Legislature(2017 - 2018)HOUSE FINANCE 519
04/03/2017 01:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Amendments | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 3, 2017
1:05 p.m.
1:05:38 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:05 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
Representative Louise Stutes (Alternate)
MEMBERS ABSENT
Representative David Guttenberg
Representative Scott Kawasaki
ALSO PRESENT
Richard Pomp, Professor of Law, University of Connecticut
School of Law; Bethann Chapman, Trust Attorney, Faulkner
Banfield, Juneau; Taneeka Hansen, Staff, Representative
Paul Seaton; Randall Hoffbeck, Commissioner, Department of
Revenue; Representative Jonathan Kreiss-Tomkins.
PRESENT VIA TELECONFERENCE
Brandon S. Spanos, Deputy Director, Tax Division,
Department of Revenue.
SUMMARY
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster addressed the meeting agenda.
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
1:07:04 PM
Co-Chair Foster shared that the following speaker,
Professor Richard Pomp, had been hired by the Department of
Revenue (DOR) to craft the technical elements of a tax
based on adjusted gross income. The professor had been
hired by the administration based on his expertise on the
subject and his contract was for a draft bill. He had not
been hired to act as a consultant to the administration or
the co-chairs of the House Finance Committee. He elaborated
that Professor Pomp had assisted in language interpretation
and ensuring the language was accurate. He relayed that the
bill before the committee was not Professor Pomp's or the
administration's bill; it incorporated many of his
technical elements but policy decisions had been made in
the co-chairs' offices and the bill had been redrafted by
Legislative Legal Services. He furthered that policy
decisions such as the tax rates and the allowable
deductions had been decided upon by the co-chairs' office.
RICHARD POMP, PROFESSOR OF LAW, UNIVERSITY OF CONNECTICUT
SCHOOL OF LAW, provided detail about his professional
background. He relayed that the opinions he would share
during the meeting were his own and not affiliated with any
organization. He shared he had a consulting practice and
had worked with Alaska on a fairly large case, involving
the Tesoro Corporation, that had gone all the way to the
Alaska Supreme Court. He was happy to report the state had
won. He also represented other states and some of the
Fortune 500 such as Netflix, AT&T, Toys-R-Us, GE, GM, CBS,
and other.
Mr. Pomp noted that he had provided a summary of the rolls
of trusts ["Irrevocable Trusts" (copy on file)]. He
detailed that the trust section had probably been the most
difficult part of the draft legislation, in part because
there had been a very conscious attempt to protect Alaska's
trust industry. He specified that in 1997 Alaska was one of
the first states to start to make its trust laws attractive
to nonresidents. Unfortunately, since that time, Alaska had
lost its first-to-market advantage because many states had
jumped on the bandwagon, including Delaware in 1997. He
understood the importance of protecting Alaska's trust
industry, which he believed the bill did. A multitude of
other states offered high net worth taxpayers a chance to
establish trusts and they would not be taxed in those
states. He explained the situation was part of the backdrop
the legislation had to take into account and deal with. He
furthered that unfortunately it was a race to the bottom
because once one state provided an attractive environment
for the formation of trusts, other states jumped in, which
had resulted in numerous competing states offering
essentially zero tax on trusts.
Mr. Pomp detailed that the legislation divided trusts into
two groups: resident trusts and nonresident trusts. He
relayed that trust accounting was among the most
complicated of anything dealt with in the bill; it was the
province of a fairly small group of specialists - he did
not include himself in the category. He continued that it
was an opaque and sophisticated area of the law. He had a
group of Wall Street practitioners who had been advising
him on the topic - he had learned it was very difficult to
get ahead of the practitioners who were at the cutting edge
and represented powerful, wealthy families. He continued
they had the very latest in tax avoidance techniques and
the draft tended to deal with the subject, but there were
no promises in the particular area of the law that the
games being played were known. He was familiar with all of
the games played pertaining to other areas of the draft
legislation. He expounded that in the trust area, it was
very difficult to feel comfortable that everything being
done was understood. He explained that sometimes it was
necessary to draft with a broad brush to bring numerous
things into the tax net and shut down a significant amount
of the game playing.
1:14:42 PM
Co-Chair Seaton relayed that the committee would also hear
from a trust attorney later on in the meeting. He referred
to a document provided by Mr. Pomp ["Short Summary of rules
on trusts in existing version L of HB 115" (copy on file)]
that noted investment income would not be considered Alaska
source income and cited AS 43.22.045(a)(9). He stated that
if there was no Alaska source income at the start of the
trust for a nonresident it was fine; however, Alaska trust
law required some amount of money to be held in an Alaskan
bank. He asked if interest paid on the money in the Alaskan
bank make the money Alaska source income and potentially
make the entire trust Alaska sourced or taxable.
Mr. Pomp replied that he did not believe so. He read from
AS 43.22.045(a)(9):
...dividends, interest, payments received under an
annuity, gains, other intangible income received from,
or attributable to, intangible personal property,
including stock, bonds, notes, bank deposits, or
annuities, if the intangible personal property is
employed in a business, trade, profession, occupation,
or employment carried on in the state;
Mr. Pomp elaborated that the latter part of the cited
statute was a reference to the nonresident beneficiary and
not someone else's business like a trust company. He
explained that the prudent question was whether a
nonresident beneficiary receiving investment income would
be considered employed in a business, trade, profession,
occupation, or employment carried on in the state by the
nonresident. He believed the answer was probably no. The
provision was independent of where the corpus is (where the
stocks, bonds, or cash may be located). He stated that had
not been made a factor under the draft legislation. He
summarized that it would simply be whether "this had
anything to do with" a nonresident's business or trade in
Alaska. He was sure that in the overwhelming number of
cases the answer would be no. He concluded that it would
not be Alaska source income and the nonresident beneficiary
would not be taxed on the specific items.
Representative Wilson asked about a scenario where a
resident and nonresident each had a trust in Alaska with
the exact same holdings. She asked if the exception would
result in the taxing of residents while nonresidents would
not be taxed.
Mr. Pomp replied that the general structure of the draft
followed the general structure of the income tax. He
detailed that in general, nonresidents were taxed only on
Alaska source income, which was a constitutional
constraint. A resident of Alaska was taxed on their entire
income, which was a pattern followed by every other state
with a personal income tax. The answer was yes, a
nonresident could be taxed only on Alaska source income -
it was the state's only jurisdictional hook with respect to
that person. He used himself as an example and explained
that Alaska had no jurisdictional hook over him unless the
income he had received was attributable to Alaska source
income. The draft cast a very broad approach as to what
constituted Alaska source income. The draft legislation
cast a broad net in reaching nonresidents - it reached the
constitutional limit of what a state could do. He relayed
that a nonresident could never be taxed on their entire
income; it had to have some link with Alaska to be
constitutional. He specified it was a bifurcation in the
jurisdictional reach between residents and nonresidents.
The rules on the trust mirrored the concept - resident
trusts were taxable on all of their adjusted gross income
and it did not matter whether the income was from an Alaska
source or not. Nonresident trusts were taxed only on their
Alaska source income, just like nonresident individuals
were taxed only on their Alaska source income.
Representative Wilson thought the system would encourage
other states to bring their trusts to Alaska, but would
encourage Alaskans to go to states like Nevada in order to
receive the same kind of breaks Alaska would be giving
nonresident trust beneficiaries in Alaska.
1:21:41 PM
Mr. Pomp replied the point was astute. He explained that
all states had to worry about their residents setting up a
trust in another location (e.g. Alaska, Nevada, Delaware,
and other). He addressed what could be done about the
issue. He explained that if it was a grantor trust - trusts
came in different sizes and shapes - it was really not
taxed as a trust. He specified that the grantor was the
person who was taxed and who set up the trust. He continued
that if the trust was revocable (as many were), it would be
a grantor trust and the grantor would be taxed on the
current income of the trust. He elaborated that the trust
did not exist in a sense - the income passed through to the
grantor. In that sense, if an Alaska resident set up a
grantor trust in another state, the Alaska resident would
pick up the income from the trust and it would be taxable
to the resident. Any time there was a grantor trust, the
problem identified by Representative Wilson went away.
There were good tax reasons for grantor trusts because in
the past couple of years the rate structure on non-grantor
trusts was very compressed - the top bracket was reached at
a very low amount of income. At income of $12,000 or
$13,000 a person was already at the 39.6 percent bracket
when it came to the federal tax rate. He stressed that the
rate was very high.
Mr. Pomp continued that many grantors did not want to set
up a trust if they did not have to, that would accumulate
income and be taxed at the high rate. He elaborated that
then the 3.8 percent Medicare tax was added on net
investment income. Whereas, if it was set up as a grantor
trust, the income would flow through to the Alaska resident
grantor and for federal purposes they would receive the
benefit of a much lower marginal tax rate. There were very
good tax reasons why a grantor trust from a federal
perspective was to be preferred. The state benefitted
because the income flowed through to the grantor and would
be taxed along with the rest of the grantor's income. For a
fairly large number of trusts, the problem would go away.
The problem pertained only to the non-grantor trusts. He
acknowledged the non-grantor trusts could be very large -
some people believed the non-grantor trusts were larger
than grantor trusts, but he believed it was hard to
generalize.
1:26:25 PM
Representative Wilson asked if the bill contained anything
that needed to be altered due to a negative impact a
provision would have on a certain group of people (e.g. S
corporations, LLCs, and/or individuals).
Mr. Pomp replied that broadly speaking he would not have
worried about an inflation adjustment. The state was in a
unique position of having a dividend from the Permanent
Fund, which was worth much more than the personal
exemptions in the bill. He would probably not have bothered
with personal exemptions, given that an adjustment for
family size could be done through the distribution from the
Permanent Fund. He was aware that the dividend was lower
than it had been in the past and that if oil and gas
remained at low prices the dividend would probably not be
as generous as it once had been. He spoke to economic
consequences and noted that everyone worried about the
effect of taxation on economic development. He relayed that
states such as Kansas had eliminated its income tax with
the hope that it would stimulate the economy and more than
pay for itself in the long-term. However, the concept did
not seem to work at the state level where rates were much
lower than at the federal level. The hope was it would work
at the federal level because it seemed Congress would do
something about lowering rates with the goal of stimulating
economic development.
Mr. Pomp continued that someone could say that the bill
taxed wages, which it obviously did. An argument could be
made that it would discourage people from working. He did
not believe there was any empirical evidence for the
proposition. When it came to the issues, he wanted to see
the data. There were numerous anecdotes floating around,
some of which were self-serving and others were ideological
in nature. He just wanted to see the evidence and data. He
had seen no data that would suggest that the bill would
have negative effects on the Alaska economy. He stated that
the discussion became even more complicated when
considering what negative effects would occur if the money
was not available to spend on infrastructure and schools.
He furthered that taxes did not go into a black hole;
therefore, it would be necessary to finance government
services. He questioned what impact cuts to government
services would have. He asked if it would attract young
entrepreneurs the state may be hoping to attract. He
continued that it was difficult to speculate "on any of
this." He communicated that in the drafting of the bill he
had wanted committee members to see everything. He believed
it was much easier for the committee to go through the bill
and remove items than to leave items out to begin with. The
bill was broad and did not contain anything he thought
should not be there.
Co-Chair Foster noted they were coming to the end of Mr.
Pomp's speaking time.
Representative Wilson referred to Mr. Pomp's explanation
that people were taxed at the time a trust was paid out.
She wondered about the purpose of addressing trusts in the
legislation if it went to the individual income tax when
paid out.
Mr. Pomp answered that there was a level of tax on the
trust as it earned income that was not paid out. He
detailed that it was not desirable to have a trust used as
a mechanism to park their income and receive the benefit of
deferral without there being a current tax. When the trust
was paid out, double taxation was eliminated - the federal
rules were clear there would be one level of taxation. He
continued that if it was not taxed at the trust level, it
basically equated to a tax-free pocket book.
Representative Wilson did not think that made any sense.
She stated that even if money was being made within the
trust, if the trust was taxed based on how much money it
made and then again when it was paid out, it was double
taxation.
1:33:31 PM
Mr. Pomp responded that Representative Wilson would be
correct "if that were so." The federal rules were such that
there was no double taxation. To the extent the trust had
been taxed on income it distributed, there was no second
level of tax on the recipient.
Representative Wilson recounted that she had heard Mr. Pomp
state that money in the trust would be taxed before any
distribution was made (on capital gains, interest, and
other) and at some point once distributions began, the
individual would be taxed.
Mr. Pomp answered that the individual would not be taxed if
the money had already been taxed at the trust level.
Co-Chair Seaton clarified that a grantor trust was taxed to
the individual person. Whereas the nonresident or resident
trust was paid by the trust and when a distribution was
made it was not taxed again. There were two different
trusts that were taxed in different ways. He compared it to
a sub-S corporation and a c corporation.
1:35:28 PM
BETHANN CHAPMAN, TRUST ATTORNEY, FAULKNER BANFIELD, JUNEAU,
provided brief detail about her professional career.
TANEEKA HANSEN, STAFF, REPRESENTATIVE PAUL SEATON, agreed
with Mr. Pomp's testimony that there was no double
taxation. She explained that if a trust accumulated income
and paid nothing out in the year it was accumulated, the
income was taxed by the trust; it was not taxed a second
time when the individual eventually received the income.
She detailed that just like with wages, the [tax] withheld
was recorded and was not paid a second time. If the trust
had income distributed straight to beneficiaries, the trust
received a deduction for any income distributed and the
trust was not taxed on the income. The rules were clear and
set up so the trust was taxed or the beneficiary was taxed.
Representative Wilson did not understand the answer. She
believed they were speaking about different types of trusts
that worked differently. She asked for further explanation.
1:37:57 PM
Ms. Chapman spoke to fundamental tax law related to trusts.
There were several types of trusts "we use." Some were
revocable, meaning the person establishing the trust, the
grantor, was the beneficiary and could revoke the trust.
She detailed that revocable trusts were also called grantor
trusts under the Internal Revenue Code, meaning they were
completely disregarded for all income tax purposes (they
filed no separate tax returns - they could file
informational returns, but generally did not) and all of
the income was taxed to the individual. The Alaskan that
set that type of trust up, was the taxpayer under both
federal law and under the legislation. The other type of
trust used were irrevocable and involved a grantor
transferring assets into the trust without reserving the
right to revoke it. Those types of trusts were used
frequently for the protection of children, to establish
educational accounts for people with disabilities, and
other. Under the Internal Revenue Code, the irrevocable
trusts could be grantor trusts (even though the grantor had
given away the money, they were still the taxpayer). There
were many reasons that was done. She referred to Mr. Pomp's
discussion about compressed rates and the federal income
tax code, which was one of the reasons a parent may set up
a trust and pay the tax annually.
Ms. Chapman discussed the other type of irrevocable trust
called a non-grantor irrevocable trust. A person gave away
money, but was no longer considered the taxpayer;
therefore, the trust would be the taxpayer for all
purposes. She continued that those types of non-grantor
trusts may or may not pay income tax under the federal
code, depending on the structure. One of the types of
trusts was called a simple trust that acted as the taxpayer
(they were non-grantor trusts) and all of the income had to
be distributed out to the beneficiary annually. She
detailed that the trust filed a tax return and took a
deduction for the distribution paid out and the beneficiary
receiving the money paid the tax.
Ms. Chapman relayed that other types of trusts were termed
complex non-grantor trusts. She detailed that there may be
an accumulation of income that may or may not be
distributed (e.g. the income could be distributed by the
trustee to one of three children). If there was no
distribution of income or capital gains, the trust filed
the tax return, which was taxed at the trust rates. If a
distribution was made, usually the ordinary income and
sometimes the capital gains would come out to the
beneficiary on a K-1 (just like a K-1 used for pass through
entities, LLCs, partnerships, and S corporations) and the
beneficiary would pay the tax. There would not be double
taxation. She referred to an example where the tax was paid
at the trust level and no distribution was made until four
years later. She detailed that under the scenario, anything
that was current income would be part of the distribution
to the beneficiary and would be taxed to the beneficiary.
Anything that had already been taxed was added to
principal, which was not taxed. The trust accounting rules
were designed to ensure there would not be a tax at both
levels.
1:42:29 PM
Representative Wilson asked if the bill contained
provisions that would discourage residents from doing an
estate or any other trust.
Ms. Chapman answered it was an income tax bill. She did not
believe it would discourage people from doing the same type
of planning. She reasoned that parents would still want to
protect their children. She affirmed that how something
would be taxed would be considered. There would be
consideration about whether to make more grantor trusts or
just have the tax pay it. She addressed what was typically
done to minimize tax. She referred to an amendment that
would make the scenario much simpler for people doing trust
planning. When there were higher tax rates at the trust
level, it discouraged the accumulation of income, which
sometimes occurred on the federal level. If tax rates were
similar, Alaska would not be discouraging people from
saving the money for their children for the future.
Additionally, people in Alaska would not be put in a
situation where they may have to make distributions just to
minimize income taxes. She did not believe the bill would
discourage Alaskans from doing what they had been doing all
along.
Vice-Chair Gara asked if Ms. Chapman was familiar with
special needs trusts. Ms. Chapman replied "very familiar."
Vice-Chair Gara provided a brief description of a special
needs trust. He discussed that a person with a disability
may need a trust for their living expenses including a
special vehicle, a ramp, medicine, and living expenses. He
asked for verification his description of a special needs
trust was accurate.
Ms. Chapman replied that his description was accurate, but
she saw an amendment in the packet that was not quite
accurate. She explained that special needs trusts that were
established under federal and state law for people with
disabilities to keep public assistance were funded with the
individual's own money. She detailed that perhaps the
individual had received an inheritance or a settlement from
a car accident. She furthered that those types of trusts
could only be used for supplemental needs such as a van or
ramp to a house. However, under social security rules the
funds could not be used for housing, medical care that
would be provided by Medicaid, and food. The other type of
trust used was known as a third-party trust or supplemental
needs trust. She used an example of a grandparent wanting
to leave a small inheritance to a child with special needs.
The grandparent would create a trust that would benefit the
child - those trusts were not known as special needs
trusts, but as discretionary trusts. Her only concern [with
the amendment] was with references to being used for food
and shelter - under social security rules, special needs
trusts could not be used in that manner.
1:46:16 PM
Vice-Chair Gara relayed that Ms. Chapman was referring to
his Amendment 18. He stated the amendment was defined more
broadly where the trust may also include a disabled
person's need for housing. The intention of the amendment
was to address situations where a trustee had lost their
social security income and wanted to lose their
eligibility, the funds in the trust would still be
nontaxable as long as used for those things. If a person
wanted to keep their social security they would draft it
narrowly, but if they did not mind losing their social
security, the amendment would give the individual the
option to have trust funds tax free. He asked if there was
a problem with the proposal.
Ms. Chapman replied no and believed it was a wonderful
idea.
^AMENDMENTS
1:47:19 PM
Co-Chair Seaton MOVED to ADOPT Amendment 11, 30-LS0125\L.31
(Nauman, 3/30/17) (copy on file):
Page 11, line 21:
Delete "and"
Page 11, line 24, following "chapter;":
Insert "and
(F) income of an incomplete gift nongrantor trust to
which a taxpayer transferred property, less deductions
of the trust, if
(i) the income and deductions of the trust would
be taken into account in computing the taxpayer's
federal taxable income if the trust in its entirety
was treated as a grantor trust under the Internal
Revenue Code;
(ii) the trust is a resident trust;
(iii) the trust does not qualify as a grantor trust
under U.S.C. 671 -679 (Internal Revenue Code); and
(iv) the grantor's transfer of assets to the trust is
treated as an incomplete gift under 26 U.S.C. 2511
(Internal Revenue Code);"
Representative Wilson OBJECTED.
Ms. Hansen explained that the amendment would add income
back into federal adjusted gross income for consideration.
She detailed it pertained to an incomplete non-grantor
trust. The language had originally come from Mr. Pomp and
she had conversations earlier in the day with some trust
companies and a trust attorney. The specific trust was
complicated and would enable a person to create a trust
that for tax purposes was considered a non-grantor trust -
a trust that did not come back into a person's income. She
continued that it was incomplete, meaning a person did not
pay the federal gift tax and still retained certain powers
of choosing who, how, and when distributions were made.
There would probably not be many Alaskans choosing the
particular trust given its complexity. She relayed that New
York had already taken action [similar to the amendment] to
clarify that in the specific trust where the grantor
maintained some control over the income, the income should
be considered in the individual's return just like in a
normal grantor trust.
1:49:38 PM
Representative Pruitt asked if the amendment provided an
exemption to the adjusted gross income category.
Ms. Hansen answered that the income would be added back
into adjusted gross income. On the federal level, the
specific trust [incomplete non-grantor trust] was not
considered a grantor trust. The amendment would designate
that for the state level and in the particular
circumstance, the trust would be considered a grantor trust
and it would be included in adjusted gross income.
Representative Pruitt thought the whole purpose of adjusted
gross income was to make the scenario much more simple than
it was about to become. He asked why they were considering
reversing courses.
Ms. Hansen replied that the chances the item would be
necessary were very slim and most residents would not be
impacted by the provision. She noted that subsequent
amendments would lower the tax rate brackets on trusts in
general. The amendment sponsor was supportive of that
change because of the many non-grantor trusts that should
not be taxed at a 7 percent rate. She explained it was the
one example where very high income individuals may
potentially move their assets. One of the primary purposes
of the specific trust was for state income tax avoidance.
Representative Pruitt asked why they were including the
provision if they did not expect it to be used.
Co-Chair Seaton replied that the goal was to establish an
income tax without numerous loopholes. The specific
loophole had been seen in other states; therefore, the
amendment would ensure the specific loophole could not be
used in Alaska. The amendment was a preventative measure.
Delaware incomplete non-grantor trusts never got completed,
but due to tax avoidance, a person had money that did not
get taxed. The amendment established that if a person set
up one of the specific trusts in Alaska, it would be
treated as the individual's own income as if it was a
completed grantor trust.
1:52:40 PM
Representative Pruitt stated there had been a movement from
the initial 15 percent to the adjusted gross income. He
believed the intent was to make things as simple as
possible. He referred to line 37 of the 1040 form [adjusted
gross income line on U.S. Individual Income tax Return form
(copy on file)]. He added there were not supposed to be any
deductions afterwards. He thought the amendment seemed like
the start of carving out holes seen as loopholes above and
below the adjusted gross income lines. He asked if there
had been a departure from trying to keep things simple. He
believed they were trying to make their own system that was
loosely based on the federal system and it would be subject
to change in the future based on whether or not it could
bring in more money to pay for state government.
Co-Chair Seaton responded that trusts were very complex
subjects. He detailed it was a way in some cases to avoid
tax. If the legislature did not want to include loopholes,
it should make what was and was not allowable as clear as
possible. The amendment attempted to take the experience of
other states and make sure people knew they could not use
the incomplete trust as a tax loophole in Alaska.
Representative Wilson asked for verification the amendment
dealt only with resident trusts.
Ms. Hansen answered that under the amendment the income
would come back to the individual resident for taxation.
Representative Wilson pointed out that (F)(ii) of the
amendment specified that it pertained to resident trusts
that were currently not federally taxed.
Ms. Hansen replied that if it was a nonresident trust,
there would not be a way for the state to tax the
individual because the money would be going back into the
nonresident's income. Therefore, the amendment could only
apply to a resident.
Representative Wilson thought the provision would encourage
Alaskans to go to states like Nevada because the trust was
not federally taxed, but would be taxed in Alaska. She
reasoned that if a person moved the trust to Nevada they
would not have federal or state taxes.
1:56:17 PM
Ms. Hansen answered that the trust would still be taxable
because the income would be added back into the resident's
adjusted gross income. She emphasized that the amendment
was a preventative measure. The trusts would likely not be
seen in Alaska.
Representative Wilson wanted to understand the issue. She
was trying to determine if the provision would encourage
individuals to have the trusts in another state.
Ms. Hansen responded that it may be possible for an
individual to establish the particular type of trust in
another state, but all of the income used to establish the
trust would need to be from a source outside of Alaska.
Additionally, any trustees and corpus of the trust would
have to be out-of-state.
Representative Wilson thought some of the amendments would
be hard to vote on. She had spent most of the weekend
trying to research what the amendments would do. She did
not have the expertise on the issues and had received
conflicting answers about what the amendments would do and
how they would impact Alaskans. She continued that if they
were really talking about income coming out of a trust, S
corporation, or an LLC, she believed tax would be recouped
based on the existing system. She did not understand why
they were discussing trusts at all when the issue was about
income tax.
1:59:09 PM
Vice-Chair Gara supported the amendment. He spoke to the
discussion that the amendment was complex. He stated that
on the federal tax form [1040] it was necessary to make
every calculation already prior to getting to the adjusted
gross income. Under the bill a person would use the same
number they had already calculated on their federal tax,
which was not complex. The issue in the amendment was
whether the legislature wanted someone to avoid tax if they
had a large amount of money. He did not believe a goal of
the bill should be to let the wealthiest people hide their
money from taxation.
Representative Wilson did not understand how a person would
be able to hide their money. She reasoned that when money
was taken out, there would be a charge. She asked how
someone could be hiding their money. Additionally, if the
person was hiding their money in Alaska, she asked if there
was any other avenue for the person to do the same thing
somewhere else.
Ms. Chapman clarified that they were not talking about
hiding money. The issue was about proper tax planning. She
stated that Representative Wilson was correct in stating
that in almost all instances the state would receive tax
because some assets would be distributed out of the trust.
The topic addressed by the amendment was an extremely
narrow subset of irrevocable trusts that were taxed as
separate entities for federal tax purposes. She believed
the amendment aimed to address wealthy Alaskans taking
money from Alaska and moving it to another state without an
income tax. If the funds were not distributed, Alaska would
receive no tax, whereas, if money was distributed, Alaska
would receive the tax. The amendment pertained to trusts
established by residents in another jurisdiction that did
not make distributions from and did not pay state income
tax. She noted there were some rulings from the IRS, but
she believed whether the trusts worked or not was still in
debate. The amendment was trying to specify that the
individual would still have to pay tax on the trust in
Alaska even if no distribution was made.
2:02:11 PM
Representative Wilson surmised it was about whether a
person paid at present or later. She believed Alaska would
ultimately receive the tax. She stated that the amendment
would mean the trust would be taxed at present versus
waiting four or five years when it was paid out. She
continued that the money would ultimately be taxed. She did
not believe anyone was hiding money anywhere.
Ms. Hansen replied that the beneficiaries of the trusts may
not be Alaskans. She continued that it was a very specific
type of trust - the Alaskan who created the trust was not
the beneficiary, but they maintained control over the money
in the way they did not in many of the other non-grantor
types of trusts. The individual was not avoiding the tax on
a federal level. She clarified that it pertained to
planning within the tax law. On the federal level there was
no tax avoidance, it was just one way the individual had
been able to disassociate that income with their state of
residency and therefore avoid the state income tax.
Representative Wilson thought it was important to be
careful when referring to tax avoidance and surmised that
if an individual was breaking the law the IRS would step
in. She wondered how the state would know what a trust
earned. She continued that the trust may not be located in
Alaska. She surmised that because beneficiaries may not be
Alaskan residents, the state wanted to make sure to get its
share before the money was distributed. She believed the
enforcement system sounded like a nightmare. She wondered
how many people the state would need to hire to look into
the trusts in other states to determine how to tax
individuals. She opined that it was very far reaching in
comparison with waiting until a distribution was made [to
receive the tax].
2:05:05 PM
Co-Chair Seaton believed that telling people that the issue
was not legal would probably solve the problem if people
understood it was illegal to have a trust that was never
completed, where the individual still controlled the money.
He elaborated that the issue was complex and involved
attorneys and could involve tax court. The amendment
included language to ensure a tax loophole was not created,
a loophole that had been found in other states and
responded to.
Vice-Chair Gara spoke to his understanding of the concept.
He surmised that the federal government did not tax until
the distribution occurred - it did not matter what state a
person moved to because they were still subject to federal
tax. He continued that states had a different issue -
states were trying to avoid a situation where someone did
not distribute the trust income and then in a year they
wanted to distribute the income they moved to a state with
no tax. He asked if his understanding was accurate.
Ms. Hansen responded that the federal government did tax
trusts that accumulate income. She agreed that it did not
matter to the federal government what state of residency a
trust was established in - the government would receive the
same share out of the trust no matter what. She continued
that it did matter to the state whether or not the resident
was able to move the asset out-of-state through a trust.
She noted the subsequent amendments were simpler.
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Ortiz, Gara, Grenn, Stutes, Foster, Seaton
OPPOSED: Pruitt, Thompson, Tilton, Wilson
The MOTION PASSED (6/4). There being NO further OBJECTION,
Amendment 11 was ADOPTED.
2:08:20 PM
Co-Chair Seaton MOVED to ADOPT Amendment 12, 30-LS0125\L.32
(Nauman, 3/30/17) (copy on file):
Page 26, line 18, following "law;":
Insert "or"
Page 26, line 27, through page 27, line 4:
Delete all material.
Representative Wilson OBJECTED.
Ms. Hansen explained that the amendment would adjust the
definition of resident trust to ensure the bill did not
overreach and capture nonresident trusts currently
administered in Alaska. The amendment sponsor did not want
to interfere with the trust industry. She explained that if
nonresident trusts were taxed as resident trusts they would
move to another state. The original bill draft included a
definition that was too broad. The amendment would delete
items C, D, and E, which stated [version L]:
(C) a trust consisting of property that is or will be
disposed of or administered under state law;
(D) a trust with a fiduciary or beneficiary other than
a beneficiary whose interest in the trust is
contingent, that is a resident of the state, and the
laws of the state will govern the administration of
the trust; the residence of a corporate fiduciary
means the principal place where the corporation
transacts the administration of the trust; or
(E) a trust that is administered primarily in the
state and governed by the laws of the state.
Ms. Hansen elaborated that currently under the trust
industry Alaska's trust law required that part of the
corpus of the trust be held in-state in order for it to be
covered by Alaska trust laws. She explained it was a
benefit to Alaska's communities and banking industry
because it allowed them to have money deposited in local
banks that would not otherwise be there (the money was not
from an Alaskan source). The deletion of the items would
more closely align Alaska with some other definitions of
resident trusts such as New York, and would allow the trust
industry to continue.
Representative Wilson did not want to be like New York. She
was concerned that the amendment would create two classes
of trusts: resident trusts and nonresident trusts. She
believed it would make it enticing for nonresidents to come
to the state to establish trusts because the state was not
going to tax them at the same rate as residents. She
continued that it would force Alaskans to go to another
state to get the same benefit. She thought it was wrong in
every way. She was supportive of the trust industry in
Alaska, but providing more advantage to nonresidents did
not make sense to her. She asked if the amendments had been
added to amendments the committee had heard the previous
week.
Co-Chair Foster believed everything was in order.
Ms. Hansen replied that the bill before the committee had
been updated to reflect the amendments that had been
adopted in the past (to bill version E). The bill was a new
version (version L).
Co-Chair Seaton relayed there had been significant concern
about the trust industry established in Alaska. The
amendment aimed to ensure the trust industry was not
impacted and could be maintained in Alaska as it was
previously. He explained that Mr. Pomp had a different
philosophy, which was to tax everything that was
constitutional to tax, including nonresident trusts. The
co-chairs felt it had been too broad. He detailed that the
committee had heard during public testimony that people
wanted to make sure the trust industry, including the
nonresident trust industry, was allowed to go forward as it
had been.
2:13:31 PM
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Thompson, Gara, Grenn, Stutes, Ortiz, Seaton,
Foster
OPPOSED: Pruitt, Tilton, Wilson
The MOTION PASSED (7/3). There being NO further OBJECTION,
Amendment 12 was ADOPTED.
2:14:13 PM
Co-Chair Seaton MOVED to ADOPT Amendment 13, 30-LS0125\L.46
(Nauman, 4/3/17) (copy on file):
Page 9, following line 27:
Insert a new subsection to read:
"(d) A trust that is exempt from federal income tax
because of its purpose or activities is not subject to
tax under this chapter."
Representative Wilson OBJECTED.
Ms. Hansen explained that the amendment added clarifying
language that a trust exempt from federal income tax due to
its purpose or activities, was not subject to tax. She
relayed that it had already been true because the trust
would only be taxed on taxable income, which was based on
federally adjusted gross income. Those types of trusts
would not have been in that income. She used a charitable
remainder trust as an example. She deferred to Ms. Chapman
for additional examples.
Representative Wilson asked about the types of trusts that
applied.
Ms. Chapman answered that it would also include retirement
trusts. For example, a 401k with a private employer had
associated qualified trusts and was not subject to federal
income tax under Section 401(a).
Representative Wilson asked about union trusts. Ms. Chapman
deferred to Ms. Hansen.
Ms. Hansen answered that unions had a type of trust called
Taft-Hartley, which was a type of pension trust that was
exempt federally. Additionally, some of the union medical
trusts were also exempt.
Representative Wilson asked why the trusts had been
included if the bill would not tax federally taxed trusts.
Ms. Hansen answered that the amendment included clarifying
language only. If someone was reading through the bill
section related to tax on trusts they would be able to know
the bill would not levy a tax on trusts exempt on a federal
level.
2:17:05 PM
Representative Pruitt stated that Amendment 11 had tried to
get as much money as possible by eliminating loopholes. He
commented that the current amendment (Amendment 13) would
give some people a pass [from taxes]. He asked why the bill
went after more money in one case and gave people a pass in
another case.
Vice-Chair Gara explained it was a policy call not to tax
trusts that currently had an existing no-tax policy. He
would listen to an amendment to the amendment to add taxes
that were not in the bill, but he would probably oppose it.
Ms. Hansen referenced the committee's earlier discussion
about incomplete non-grantor trusts and relayed that those
distributions would have been federally taxed at some
point; therefore, those trusts did not fit into the
category of trusts that were tax exempt for their purpose
or activities.
Representative Wilson asked if any of the trusts related to
the current amendment would be taxed when they made
distributions.
Ms. Chapman replied that charitable trust distributions
were made to charities and were never taxed; however, a
charitable remainder trust could have interest or income
distributions to individuals, which would be taxed. She
explained that if she set up a charitable remainder trust
where she had the right to receive the income for her life
and when she passed away the remainder went to charity, it
was an exempt trust under federal law, but she would be
taxed on the income because she was an individual. Anything
that went to a charitable organization that was exempt
under [Internal Revenue Code Section] 501, would never be
subject to tax at the federal level.
Representative Wilson asked if it was known how much more
money would come into the state if the amendment failed.
Alternatively, she wondered how much the state would lose
in income if the amendment passed.
Ms. Hansen answered that the bill was not currently taxing
the specific trusts, the language was merely clarifying.
Representative Wilson WITHDREW her OBJECTION.
There being NO OBJECTION, Amendment 13 was ADOPTED.
2:20:08 PM
Vice-Chair Gara asked to roll Amendment 17, 30-LS0125\L.37
(Nauman, 3/31/17) (copy on file) to the bottom of the list.
He thought the subject may be addressed by a different
amendment.
Page 13, following line 26:
Insert a new subsection to read:
"(b) For purposes of this section, the department
shall treat the undistributed and distributed income
of a trust as income."
Reletter the following subsection accordingly.
Ms. Hansen clarified that the sponsor's office had
discussion earlier in the day with a trust taxation expert.
Part of the purpose was to avoid people creating multiple
trusts just to take advantage of lower tax brackets. On the
federal level rule 26 U.S. Code 643(f) specified that if
the grantor and beneficiaries were substantially the same
person, the trusts were considered the same trust for tax
purposes. She believed the intent was already captured in
the bill because the state tax would be based on the
federally adjusted gross income and the bill specified the
trust income should be considered as it was for federal
purposes.
Vice-Chair Gara stated that the intent in the amendment was
not to have a flat 7 percent tax, but for the tax to be
based on the tax brackets based on the amount of income. He
asked for verification the intent would be accomplished
somewhere else.
Ms. Hansen replied that it was the topic of a future
amendment.
Vice-Chair Gara asked to roll the amendment to the bottom
of the list and did not believe it would be needed.
There being NO OBJECTION, Amendment 17 was rolled to the
bottom of the list.
2:22:23 PM
Vice-Chair Gara MOVED to ADOPT Amendment 18, 30-LS0125\L.41
(Nauman, 3/31/17) (copy on file):
Page 9, following line 27:
Insert a new subsection to read:
"(d) A special needs trust or other trust established
to provide solely for the housing, living expenses, or
medical care of a disabled beneficiary is not subject
to tax under this chapter. In this subsection,
(1) "disabled beneficiary" means a person who has
a physical or mental disability or a physical or
mental impairment, as defined in AS 18.80.300;
(2) "special needs trust" has the meaning given in AS
13.36.215(b)."
Representative Wilson OBJECTED.
Vice-Chair Gara explained the amendment. He relayed that in
a number of circumstances people with disabilities had a
special needs trust created. For example, if a person
suffered a terrible brain injury and needed a lift to get
in a van, special equipment to get inside their home in
order to live independently, medical care, living expenses,
and recreational equipment. Trusts were created where the
money could only be used for those things - medical related
living expenses. He detailed that disability was defined
under Alaska Statute 18.80.300 and pertained to a mental or
physical disability. The intention of the amendment was to
not tax the income from those trusts. The individuals were
dealing with very difficult life situations as it is and
the money was only spent on things related to the difficult
life situation.
Representative Wilson asked about the definition. She
assumed the amendment pertained to AS 18.80.300 (14) and
(15). She noted that subsection (14) included a definition
of physical and mental disability. She read from the
definition "a physical or mental impairment that
substantially limits a person's major life activity, only
as a result of the attitudes of others toward the
impairment; or none of the impairments defined in this
paragraph but being treated by others as having such an
impairment..." She did not believe the amendment sponsor
was addressing that portion of the definition. She believed
the amendment should be more specific on whether it
pertained to an actual disability or that someone was
treating them like they had a disability.
Vice-Chair Gara replied that the language mentioned by
Representative Wilson would result in very minor costs. He
believed it was doubtful someone would create a trust for a
perceived disability; however, if they did, it would be
fine with him. He noted it was not very much money and he
could not imagine there being a $1 million trust to address
the small issue. He surmised it would probably be a matter
of thousands of dollars. He was comfortable leaving that
portion of the definition in the amendment.
2:25:49 PM
Representative Wilson she believed an individual could not
necessarily have what would generally be considered a
disability, but still fit under the definition and be
allowed to set up a trust for housing and living expenses.
Vice-Chair Gara stated that if Representative Wilson wanted
to come back with a clean definition to address the portion
of the disability she did not think needed to be addressed,
he would be happy to adjust the language. However, on the
fly, the kind of disability mentioned by Representative
Wilson would not involve very much money. It was a policy
call. He could go along with the concern if Representative
Wilson had an adjustment to the language. He believed the
more important thing was to not tax the trusts. He was
happy to work with his colleague if she had a refinement to
make.
Representative Wilson suggested limiting Amendment 18 to AS
18.80.300 14(a) "a physical or mental impairment that
substantially limits a person's major life activity..." She
believed the subsection included the disabilities Vice-
Chair Gara was referring to. She furthered that individuals
needing extra assistance would be the ones setting up the
trust and utilizing them. She did not believe the other
definitions fit the amendment sponsor's description.
Vice-Chair Gara stated that he also wanted to include a
condition that may require the use of a prosthesis and
special equipment for mobility. He explained that
Representative Wilson's proposed language would delete
that. He was happy to work on a more narrow definition, but
he did not want to exclude individuals who needed help
because they had lost a limb or other.
Representative Wilson agreed and stated that subsections
(A) and (D) would fit Vice-Chair Gara's description. She
MOVED to AMEND Amendment 18 to limit the definition to AS
18.80.300 (14)(A) and (D).
Vice-Chair Gara had no objection to the proposed amendment.
There being NO OBJECTION, Amendment 18 was amended.
2:29:41 PM
Representative Pruitt asked if a special needs trust needed
to be established as a special needs trust.
Ms. Chapman replied that the definition of 13.36.215(b) was
limited to first-party trusts, which were special needs
trusts meeting social security rules. The trusts were
established under very specific rules. She believed the
amendment also covered other trusts that may be broader for
individuals with disabilities.
Representative Pruitt used a trust established for a senior
as an example. He asked whether a senior who fit within the
rules under discussion would automatically fall under the
category. Alternatively, he wondered if the trust had to
initially be set up in a manner specifying it would be tax
exempt or if the trust could become tax exempt if the
individual found themselves fitting within 18.80.300
(14)(A) or (D).
Ms. Chapman answered it would depend on how the trust was
written. Typically if an attorney was drafting the trust
for someone with a disability, they would include all of
the limitations. Sometimes trusts were drafted more
broadly, but they may include a provision specifying that
if the events were to occur to the individual beneficiary
the definition would be limited at that time. She relayed
it would depend on how the trust was drafted, but generally
they were always set up with the goal of being special
needs trusts or trusts with disabilities.
2:31:35 PM
Representative Pruitt asked if the trust could be amended.
For example, if an individual became disabled after a
certain period of drawing from a trust, he wondered if the
trust could be amended.
Ms. Chapman answered that the trusts under discussion were
irrevocable and the individual establishing the trust
generally did not have the authority to make amendments.
However, under Alaska law there was the ability to go to
court to obtain amendments to trusts if it an amendment
would be in the best interest of the beneficiary.
Additionally, there was a provision that granted trustees
in certain circumstances the ability to amend trusts,
particularly to create special needs trusts. The definition
referenced under 13.36.215(b) was relating to that type of
trustee powers. The goal had been to draft the trust laws
to be very useful to help people with disabilities.
Vice-Chair Gara stated that a special needs trust was
created by a specific class of people. There could also be
a trust that did the same thing to help someone with a
disability that was not called a special needs trust. The
goal was regardless of who created the trust, if it was a
special needs trust, it should be tax free. He asked for
verification that special needs trusts were, by definition,
only those trusts created by a certain class of people.
Ms. Chapman replied in the affirmative. The definition of
special needs trust was for people who need to comply with
the social security rules to continue to receive their
social security and also for Medicaid purposes. The
definition in the amendment would be broader. She added
that other types of trusts that were not special needs
trusts were used, as narrowly defined under federal law,
for people with disabilities.
Vice-Chair Gara asked who had to create the trust for it to
be a special needs trust.
Ms. Chapman replied that she did not have the definition
statute in front of her, but she believed the provision was
referring to first-party trusts, which meant it was the
individual. Up until recently the trust had to be
established by the court, a parent, or a grandparent, but
federal law had just recently changed to make them easier
to establish.
Representative Wilson asked for verification that an
individual would not have the ability to take their
irrevocable trust and call it a special needs trust. She
surmised that under the amendment the trust would have to
be established as a special needs trust.
Ms. Chapman clarified that the individual could call the
trust a special needs trust. She detailed it was a name
that had been used as a shorthand for the specific type of
trust. She continued that the trusts were established with
names "like that," but it may not comply with the social
security rules. The trust would just not be qualified under
social security. An individual could call a trust anything
they wanted to. She detailed that special needs trusts were
very restrictive under federal law. She concluded that it
was okay if a trust did not comply with the federal rules,
but they were done for different purposes.
2:35:28 PM
Representative Wilson thought there was something called a
special needs trust, which was the reason she was amenable
to the amendment and why she wanted to ensure the
definition was accurate. However, she now believed that if
a person said the trust was special needs and did not want
to pay state income tax, the individual would have to fill
out paperwork or some proof to show they fell under the
statutory definition of disabled. She asked if it would
have to take place to abide by the amendment.
Ms. Chapman replied that the way she understood the
amendment was that if she had established a trust for a
disabled beneficiary that met the requirements, the trust
would be exempt.
Representative Wilson asked if it was the intent of the
amendment. Her understanding of the amendment was to make
sure the state took care of individuals with a disability.
She stated that she had mistakenly believed that a special
needs trust was an actual type of trust. She now understood
it was merely terminology. She wanted to ensure the
amendment would not result in significant regulation so
that "something has to be proven that they fall underneath
this."
Vice-Chair Gara cited line 3 of the amendment that
specified a special needs trust or other trust that did the
same thing. He explained that the special needs trust had
to be created by the beneficiary. He also wanted the same
kind of trusts created by a third party to be covered. He
did not care who created the trust, but he did care that
the money was used for someone with a disability for their
living expenses, including recreational expenses, dignity
expenses related to the disability, a lift for a van, and
all items related to a person's living because of their
disability.
2:38:06 PM
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 18 was ADOPTED as amended.
2:38:26 PM
Co-Chair Seaton MOVED to ADOPT Amendment 24, 30-LSO125\L.48
(Nauman, 4/3/17) (copy on file):
Page 9, lines 11 - 13:
Delete "A seven percent tax is imposed for each
taxable year or portion of taxable year on the taxable
income of a resident or nonresident trust or estate."
Insert "A tax is imposed for each taxable year or
portion of a taxable year on the taxable income of a
resident or nonresident trust or estate. Except as
provided in (b) of this section, the tax under this
section for a trust or estate is determined as
follows:
If the taxable income is Then the tax is
Less than $50,000 2.5 percent of the
amount in excess of
$0
$50,000 but less than $100,000 $1,250 plus 4
percent of the
amount in excess of
$50,000
$100,000 but less than $200,000 $3,250 plus 5
percent of the
amount in excess of
$100,000
$200,000 but less than $250,000 $8,250 plus 6
percent of the
amount in excess of
$200,000
$250,000 or more $11,250 plus 7
percent of the
amount in excess of
$250,000.
(b)"
Page 9, line 15, following "Code).":
2Insert "(c)"
Reletter the following subsections accordingly.
Page 9, line 24:
Delete "(b)(1)"
Insert "(d)(1)"
Representative Wilson OBJECTED.
Ms. Hansen explained that the intent of the amendment was
to delete the existing flat 7 percent tax currently on
trusts and insert the same tax and apply the same tax
brackets that were applied to an individual. The one change
was that the 2.5 percent tax began on dollar one instead of
the $10,300 tax provided to an individual.
Representative Wilson requested an "at ease."
2:39:39 PM
AT EASE
2:40:18 PM
RECONVENED
Representative Wilson WITHDREW her OBJECTION.
Vice-Chair Gara stated that there had originally been a 7
percent tax on trust income. The amendment specified that
tax on trust income was based on the income tax schedule in
the bill. He elaborated that lower amounts of trust income
were taxed at a lower rate and higher amounts of trust
income were taxed at a higher rate.
There being NO further OBJECTION, Amendment 24 was ADOPTED.
2:41:20 PM
Co-Chair Seaton MOVED to ADOPT Amendment 1, 30-LSO125\L.4
(Nauman, 3/27/17) (copy on file):
Page 8, lines 6 - 17:
Delete all material and insert:
"If the taxable income is Then the tax is
Less than $20,600 $0
$20,600 but less than $100,000 2.5 percent of the
amount in excess of
$20,600
$100,000 but less than $200,000 $1,985 plus 4
percent of the
amount in excess of
$100,000
$200,000 but less than $400,000 $5,985 plus 5
percent of the
amount in excess of
$200,000
$400,000 but less than $500,000 $15,985 plus 6
percent of the
amount in excess of
$400,000
$500,000 or more $21,985 plus 7
percent of the
amount in excess
of $500,000."
Representative Pruitt OBJECTED.
Ms. Hansen explained that the amendment would correct an
error in the brackets, which was noted when the committee
substitute had been introduced. The amendment corrected tax
brackets for individuals filing jointly. The intention had
been that the minimum (the amount below which the tax was
zero) should have been a simple doubling of the minimum for
the individual tax brackets. The amount on the individual
tax brackets had been $10,300; however, the bottom amount
in the committee substitute for the joint brackets was
$22,600. The amendment would amend the brackets for joint
filers so that the taxable income began at $20,600 (double
the starting amount for individuals).
2:42:29 PM
Representative Pruitt did not support the amendment. He
relayed that he was okay with the error that gave $50 extra
dollars to married seniors making $30,000. He believed the
mistake would be a gain for those individuals. He had
recently heard from a senior who had only $127 per month to
spare after all of their expenses were paid. He the
amendment would mean taking $4 out of that person's $127.
Vice-Chair Gara remarked that there would also be a $4,000
deduction per person. For a couple it would be $28,600
before they were taxed. On top of that there would be two
Permanent Fund Dividends (PFD), which would bring the total
to over $31,000 before being taxed. He noted it would be
the subject of another amendment later on. The person with
$1,000 monthly income would not pay tax under the bill.
Representative Pruitt replied that he was well aware of the
information relayed by Vice-Chair Gara. He stated the
committee had heard $30,000 the previous week and the
amendment lowered the amount $2,000 before including
dividends. He stated it was a $50 change to some seniors.
Representative Pruitt MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Grenn, Stutes, Ortiz, Foster, Seaton
OPPOSED: Thompson, Tilton, Wilson, Pruitt
The MOTION PASSED (6/4).
There being NO further OBJECTION, Amendment 1 was ADOPTED.
2:45:20 PM
Co-Chair Seaton MOVED to ADOPT Amendment 2, 30-LS0125\L.5
(Nauman, 3/27/17) (copy on file):
Page 21, lines 22 - 24:
Delete "Regulations adopted under this section
shall require a person paying an independent
contractor to withhold a portion of the amount
paid to the independent contractor."
Representative Grenn OBJECTED for discussion.
Ms. Hansen explained the amendment. She relayed that the
current committee substitute required the department to
establish regulations for withholding on amounts paid to
independent contractors. It had later been determined that
most states did not do so. The one state that did had
determined that about 40 percent of the independent
contractors received a refund. The administrative burden of
the provision would be higher than any potential revenue.
Representative Grenn WITHDREW his OBJECTION
There being NO further OBJECTION, Amendment 2 WAS ADOPTED.
Co-Chair Seaton MOVED to ADOPT Amendment 3, 30-LS0125\L.6
(Nauman, 3/28/17) (copy on file):
Page 23, following line 28:
Insert a new section to read:
"Sec. 43.22.100. Information released to a
banking institution. Notwithstanding AS 43.05.230,
information on an individual income tax return may be
released to a banking institution to verify the direct
deposit of an income tax refund or correct an error in
that deposit."
Representative Wilson OBJECTED.
Ms. Hansen explained that the amendment would insert a
section that had been included in the original version of
the bill. The section was administrative and allowed the
release of information on a tax return to a banking
institution for them to verify the direct deposit of the
refund or an error in the refund.
Representative Wilson asked for verification that if she
did not want the government in her banking account she
could elect to not have an automatic deposit.
Ms. Hansen answered in the affirmative.
Representative Wilson WITHDREW her OBJECTION.
There being NO further OBJECTION, Amendment 3 was ADOPTED.
2:47:49 PM
Co-Chair Seaton MOVED to ADOPT Amendment 4, 30-LS0125\L.9
(Nauman, 3/29/17) (copy on file). [Note: due to the length
of the amendment it has not been included here. See copy on
file for details.]
Representative Wilson OBJECTED for discussion.
Ms. Hansen explained that the amendment would make five
changes, most of which were technical language changes and
related to administration and tax compliance for
partnerships and S corporations. There was one change
pertaining to trusts. She referred to page 9, line 26, item
(C) of the legislation - there had been a drafting error
between the original bill and the committee substitute.
Under 43.22.020 the tax on trust, item (C) was intended to
say that if a trust was considered a nonresident trust and
a trustee was a nonresident banking corporation, which was
acquired by a resident banking corporation, the banking
corporation would remain a nonresident trust for the
purposes of the situation. She detailed that the
acquisition of the nonresident banking corporation was not
something the other trustees or the beneficiary would have
any control over.
Ms. Hansen continued explaining the amendment. She directed
attention to page 12, lines 27 and 28 of the bill, which
described taxable income from a partnership or an S
corporation. The amendment made a technical correction.
Currently the section read "a partner's or shareholder's
distributive share," but it was more accurate to say "a
partner's distributive share and a shareholder's pro rata
share." She moved to Section 43.22.050 on page 18 where the
amendment would insert a new subsection (B). The section
was meant to deal with business conducted in Alaska by a
nonresident individual or a state, trust, or business. If
business was conducted by a nonresident business, the
income distributed to individuals needed to be allocated
based on the multistate compact. The language was already
included, but there was currently no reference in AS
43.22.050 to S corporations or partnerships, which needed
to be included.
Ms. Hansen addressed the next change proposed in the
amendment. She turned to page 19, following line 16, where
a new section would be inserted that dealt with personal
service and S corporations formed or used to evade income
tax. The language was very similar to existing federal
income tax statute language - several other states also had
similar language. States that did not have the language had
found a significant amount of state income tax avoidance.
Technical detail information had been provided by Mr. Pomp,
but it had not been included in the original committee
substitute in order to take time to sufficiently understand
the provision. She noted that renumbering occurred
throughout the amendment. The final change appeared on page
22, line 4 - the section related to withholding by
partnerships for nonresident partners. The following line
was inserted: "The department shall adopt regulations that
allow a partnership subject to withholding under this
section to file a composite return." She explained that a
composite return was used in many states and allowed a
nonresident partner to specify that their only income from
a state was income from the partnership. The individual
certified the withholding amount was accurate and
subsequently did not have to personally file an income tax
return for that specific state.
2:53:44 PM
Representative Wilson asked if a person with a nonresident
trust could not use an Alaska-owned bank. She noted that
they were talking about that if a nonresident financial
institution was bought out by a resident institution, the
state would not charge the nonresident. She asked about a
scenario where the bank was an Alaska bank to start with.
Ms. Hansen answered that the intention of the exception was
not for nonresident trusts, it was for a trust established
by a resident. The definition of resident trust is a trust
established based on property that belonged to a resident
of the state. She addressed the exemption in the section
related to taxing on trusts and explained that if the trust
was outside of the state, trustees were all nonresidents,
and there was no income or gains from the trust connected
with the state, Alaska did not have constitutional
authority to tax the trust. The exemption was not about a
nonresident trust placing money in an Alaskan bank or non-
Alaskan bank. It pertained to the specific situation under
AS 43.22.020 (B) in which a trust created by a resident was
not taxable by the state.
Representative Wilson countered that the language read that
"a nonresident trustee remains a nonresident trustee even
if that banking corporation is later acquired by a resident
banking corporation." She asked if a trust started in a
resident banking corporation would be taxed differently.
Ms. Hansen replied in the affirmative. She detailed that if
a resident trust had an Alaskan banking corporation
trustee, it would not qualify for the exemption under
[43.22.020] (B); therefore, they would be taxed.
Representative Wilson was trying to figure out what the
banking corporation had to do with the issue. She asked for
verification that they were specifically talking about the
type of banking corporation the trust was started in.
Ms. Hansen answered that it was not about the banking
corporation that held the money, it was about whether a
banking corporation was a trustee in the trust. She did not
know if for example the Peak Trust Company was considered a
banking corporation or not. The specific section would
apply if a company was considered a banking corporation and
also acted as a trustee. She clarified that a trust company
or trust using a local bank such as Northrim Bank, did not
automatically make the bank a trustee. The topic only
pertained to a banking corporation acting as a trustee on
behalf of a specific trust.
2:57:45 PM
Representative Wilson was trying to ensure the amendment
would not black-ball any resident banking corporation. She
did not want to give an unfair advantage to a different
type of banking corporation.
Ms. Hansen did not believe it would be the case, because
Representative Wilson was speaking about a trustee that was
a nonresident banking corporation at the time the banking
corporation became a trustee. Once a banking corporation
was considered a nonresident trustee, their status would
not change.
Representative Wilson read from AS 43.22.050 that dealt
with "business conducted in the state by a nonresident and
directs the department to regulate what is considered
income from a source within the state." She asked why the
department would be writing regulation on income from a
source within the state. She believed it should be written
within the bill so that someone would be able to read the
provision and know what income from a source within the
state actually meant.
Ms. Hansen answered that the section also specified that
"regulations adopted under this subsection must be
consistent with AS 43.19 and AS 43.22.045." She explained
that AS 43.22.045 fell within the bill and defined income
from a source within a state. If an entity had business
inside and outside the state, it was necessary to adjust
for the multistate compact. The section specified that the
state would take the rules on state source income laid out
in AS 43.22.045 and the multistate compact rules and would
make sure they worked together within the state's
regulations.
2:59:49 PM
Representative Wilson referred to the provision where the
department would set out regulation for partnerships
required to withhold income on a nonresident partner. She
asked about the reasoning for the language.
Ms. Hansen responded that there were two circumstances the
situation may occur. The first was in the case of a
composite return where a nonresident partner may choose to
have the partnership withhold for their benefit so they did
not have to file an individual income tax return. Second,
the partnerships were already filing a Chapter K
information return with DOR. She believed it was fairly
common practice for the partnerships to withhold on
nonresident income.
Representative Wilson was fine with having a report, but
she noted that many times when departments were asked to
set more regulation, the regulation did not quite fit the
legislature's intent. She stated that she would not have a
problem if the amendment only pertained to how taxpayers
would be recording the information and sending in their
returns.
Representative Pruitt spoke to the portion of the amendment
pertaining to tax avoidance. He understood the intent, but
he referred to subsection (B) where avoidance or evasion
was defined. He was trying to understand how the
terminology appropriately defined avoidance. He asked how
to determine accurately that a taxpayer was actually
avoiding tax.
Ms. Hansen replied that the language was very similar to
language in federal income tax rules. She believed there
were well-defined rules already guiding the subject - the
amendment used the same language.
Representative Pruitt asked for verification that the
particular section would be defined through regulation.
Ms. Hansen responded that definitions could not be set
forth in regulations, which was the reason for the
inclusion of subsection (B) that defined the avoidance or
evasion of income tax. The way to implement the definition
would be set forward by regulation.
3:03:33 PM
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Grenn, Stutes, Ortiz, Pruitt, Thompson,
Seaton, Foster
OPPOSED: Tilton, Wilson
The MOTION PASSED (8/2). There being NO further OBJECTION,
Amendment 4 was ADOPTED.
3:04:12 PM
AT EASE
3:24:43 PM
RECONVENED
Co-Chair Foster noted that the committee would be moving to
Amendment 19.
Representative Thompson MOVED to ADOPT Amendment 19, 30-
LS0125\L.15 (Nauman, 3/28/17) (copy on file):
Page 4, line 17:
Delete "a new subsection"
Insert "new subsections"
Page 4, following line 26:
Insert a new subsection to read:
"(c) In accordance with AS 37.13.145(b)(2), and
subject to appropriation, 33 percent of the amount
available for distribution under (b) of this section
shall be reserved for dividends. The remainder of the
amount calculated to be available for distribution
under (b) of this section shall be reduced by the
difference between the amount calculated under (1)
of this subsection and the amount under (2) of this
subsection if the amount calculated under (1) of this
subsection exceeds the amount under (2) of this
subsection:
(1) the total amount of oil and gas
production taxes under AS 43.55.011 - 43.55.180,
mineral lease rentals, royalties, royalty sale
proceeds, net profit shares under AS 38.05.180(f)
and (g), and federal mineral revenue sharing payments
and bonuses received by the state from mineral leases
that are deposited into the general fund in the
current fiscal year;
(2) the sum of $1,200,000,000."
Vice-Chair Gara OBJECTED.
Representative Thompson explained that the amendment with a
prepared statement:
Amendment 19 sets a draw limit, it's the mechanism
that limits withdrawals from the Permanent Fund when
oil revenues increase or recover, or production goes
up. It's designated to address oil price volatility.
The draw limit is triggered when production taxes and
unrestricted royalties reach $1.2 billion. Once
triggered the amount calculated by the percent of
market value formula and the amount withdrawn from the
Permanent Fund is reduced by $1.00 for every $1.00 of
oil production tax and royalties that exceed $1.2
billion. This amendment mirrors the provisions that
the governor's HB 61 and SB 36 have in them. This is
the mechanism that addresses oil price volatility. The
draw limit is one of the administration's most must-
haves, but the draw limit provides guidance for saving
money during times of flush oil revenue. Without the
draw limit we would take the full percent of market
value draw even though oil revenues were sufficient to
cover state spending. If low oil revenue prices are
the reason that we are using the Permanent Fund today,
why would we continue to take from the fund if oil
revenues increase or recover? The draw limit is a
commitment to not use today's crisis as an excuse to
raid the fund when it isn't needed. Just like a normal
person would manage their money, this is the plan for
supplementing our paychecks with savings when our
paychecks are low, but leaving money in our savings
when our income recovers. Leaving money or earnings in
the fund when other revenues cover state costs will
allow the Permanent Fund to grow. A larger fund means
we will have larger Permanent Fund Dividends. A larger
fund means we will have larger percent of market value
contributions to the General Fund, which means there
will be more money for education and capital projects,
and smaller deficits in later years.
Representative Thompson relayed that the amendment would
protect the state's future and would grow the fund for
future generations.
3:28:17 PM
Vice-Chair Gara OBJECTED and noted the committee had
previously voted on the topic and had deleted it from the
bill. He stressed that at oil prices of $75 per barrel the
state would not be flush. He agreed that if the state was
able to save, it should. He discussed the $1 billion in
deferred maintenance for the University of Alaska alone. He
continued that the cost continued to increase because the
maintenance continued to be deferred. He did not want to
continue to spend money on things that were wasteful and
that was in the eye of the beholder. In the past he had
opposed unaffordable megaprojects and he would continue to
oppose projects such as the Susitna dam and the Knik Arm
Bridge. He remarked that at some point there were basic
things that needed to be done. He referenced the Seward
Highway as an example and discussed the need for
modification to reduce the number of highway deaths.
Additionally, there were dangerous roads north of
Anchorage. He believed the number $75 per barrel was
arbitrary. He would consider proposals like the one in the
amendment, but he did not support specifying that
additional oil revenue at prices between $75 and $100 per
barrel could not be used for things like deferred
maintenance or road construction. He had heard people say
the concept would be unenforceable, but he did not want to
put something in statute that was not enforceable.
Co-Chair Seaton spoke in support of the amendment. He
explained that when the amendment had initially been
proposed, more modeling and information had been needed.
Since that time there had been modeling from the
administration showing the cap lowered volatility and
depletion of the reserve and made sure the potential
failure rate was lowered to less than 1 percent. He added
that modeling from the Legislative Finance Division also
showed the same results that the action would make things
much more stable over time.
3:31:40 PM
Representative Pruitt spoke in support of the amendment. He
believed the amendment was a key piece of ensuring the
long-term stability of the Permanent Fund. The amendment
would mean the failure rate would be minimal in comparison.
He clarified that the amendment would not reduce the amount
of oil and gas revenues available, it would reduce the
Permanent Fund utilization; it was a dollar-for-dollar
exchange of oil money for what would have been spent from
Permanent Fund money. He reiterated that the amendment
would ensure the strength of the Permanent Fund, which he
believed was one of the most important things that could be
done.
Vice-Chair Gara referred to discussion about the failure
rate. He stated that with the amendment there was a failure
rate of approximately 1 percent and without it the failure
rate was approximately 2 percent over 25 years. He believed
the difference was negligible. He did not want anyone to
believe the bill as written provided any great danger of
failure. He reasoned that under any circumstance the
legislature would act if something terrible happened in the
stock market.
3:33:24 PM
Co-Chair Seaton asked to hear about the failure rate from
the commissioner of DOR. He believed the failure rate was
closer to 8 percent without the provision.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
confirmed that the failure rate without the draw limit was
8.17 percent.
Co-Chair Seaton asked what the failure rate was with the
draw limit. Commissioner Hoffbeck answered 0.83 percent.
Representative Wilson asked if there were negative
consequences of passing the amendment. Commissioner
Hoffbeck replied in the negative and elaborated that the
administration supported the amendment.
Representative Wilson asked why. Commissioner Hoffbeck
responded that the only reason there was consideration of
using Permanent Fund earnings was due to current low oil
and gas tax and royalty revenues. If revenues returned, it
would no longer make sense to continue to also spend
Permanent Fund earnings at that point. The amendment would
provide a systematic process for turning off the use of the
earnings reserve when it was no longer necessary.
3:35:17 PM
Representative Wilson equated it to a check and balance
solution to keep state spending in control. Commissioner
Hoffbeck replied in the affirmative.
Vice-Chair Gara referred to a table from the Legislative
Finance Division that showed a cumulative failure rate of
2.4 percent over 24 years.
Commissioner Hoffbeck replied that the model Vice-Chair
Gara was referencing pertained to SB 26.
Vice-Chair Gara stated that the current bill had additional
revenue from income tax (that was not included in SB 26).
Commissioner Hoffbeck replied that when the administration
talked about a fiscal plan it assumed that all plans would
achieve the full closure of the deficit. All of the plans
without a structural change to close the deficit had
failure rates of 50 to 80 percent.
3:36:25 PM
Vice-Chair Gara asked what the total UGF available under HB
115 would be if the limit kicked in at the $1.2 billion.
Commissioner Hoffbeck did not have the number on hand.
Vice-Chair Gara asked if anyone on the committee knew. He
repeated the question.
Representative Thompson responded that DOR's probabilistic
model anticipated that the three affected revenues would
provide about $3 billion per year based on a percent of
market value of $2 billion in baseline revenue totaling
around $1 billion of the production taxes and royalties. He
stated it would bring the three revenues up to the $3
billion; the trigger had been moved to $1.2 billion as a
compromise.
Vice-Chair Gara wanted to know how much UGF would be
available if the amendment passed.
Representative Thompson replied $3 billion with the percent
of market value and the other revenues.
Commissioner Hoffbeck added that the UGF at oil of $75 per
barrel (about where the trigger would take effect) was
about $3.8 billion to $3.9 billion.
Vice-Chair Gara stressed that school funding had not gone
up in years; it was $30 million less than it had been three
years earlier. He emphasized that people were talking about
a $70 million cut to school funding. He elaborated that
Anchorage was discussing laying off 99 teachers without the
cut - potentially another 200 teachers and staff would be
lost. He detailed there were not enough prosecutors;
therefore, criminals were walking out on the street. He
mentioned other deficiencies such as a lack in troopers,
declines in University funding, and insufficient funding
for energy projects. He believed the amendment instituted
an artificial mechanism. He referenced an explanation that
the provision would not have to be followed because it was
not constitutionally mandated, which he did not find to be
a good reason to pass the amendment. He did not know what
would need to be spent five years in the future. He
surmised it was a difference in philosophy on whether or
not the legislature should try to address the public's
needs annually or whether it should be done with a formula
"five years before you know what's going to happen."
3:40:32 PM
Commissioner Hoffbeck clarified that it only included the
three categories of income - unrestricted other funds (from
taxes and other fees), oil and gas revenue, and the
Permanent Fund draw. The total did not include any other
new revenues that may be passed. It provided about $600
million in headroom over the current budget prior to
kicking in.
Representative Wilson asked for verification it would not
include any reforms (e.g. Medicaid reform or other) that
may save money. Commissioner Hoffbeck responded that any
monies saved with reductions in expenditures could be
reappropriated someplace else; it did really impact the
calculation. Cuts to one area made money available
elsewhere because the amendment would not restrict use of
the funds.
Representative Wilson supported the amendment. She
commented that the amendment pertained to just one
component of the calculation. She continued that they were
going into the Permanent Fund for the first time. She
continued that the state was in the situation partly due to
some of the choices the legislature did not want to make in
terms of where to decrease government. She furthered they
had also been making smarter choices on legislation that
had been passed that would bring savings. She addressed the
statement that the state would not have sufficient funds to
fix existing infrastructure. She hoped changes would bring
a smarter and more efficient government that may not
require as much funding. She stated the public had been
very clear that it was nervous about how the money was
spent. She believed the amendment would act as a check and
balance. She spoke to an increase in resource development,
corporate taxes, business licensing, and other. She
stressed the amendment would not result in a lack of money
to fund important items.
Representative Thompson pointed out that when oil prices or
production were high, other revenues increased. He cited
corporate income tax and investment revenue and other as
examples. He stated that the aforementioned revenues were
not impacted by the draw limit. He reasoned there was more
money to spend even with the dollar-for-dollar offset.
3:44:04 PM
Representative Pruitt added that if more oil was produced,
more royalties were going into the Permanent Fund, meaning
there would be more money to make money off of and a larger
opportunity for percent of market value dollars to be
available. It allowed for growth in several places.
Vice-Chair Gara MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Wilson, Grenn, Stutes, Ortiz, Pruitt, Thompson,
Tilton, Foster, Seaton
OPPOSED: Gara
The MOTION PASSED (9/1). There being NO further OBJECTION,
Amendment 19 was ADOPTED.
3:45:12 PM
Co-Chair Seaton MOVED to ADOPT Amendment 5, 30-LS0125\L.17
(Nauman, 3/29/17) (copy on file):
Page 7, line 6:
Delete "AS 43.22.070(h)"
Insert "AS 43.22.070(i)"
Page 19, lines 26 - 27:
Delete "A person required to pay tax under this
chapter"
Insert "A taxpayer"
Page 19, following line 30:
Insert a new subsection to read:
"(b) The department shall determine and publish
the federal adjusted gross income below which an
individual is not required to file a tax return
under this section."
Reletter the following subsections accordingly.
Representative Wilson OBJECTED for discussion.
Ms. Hansen explained that the amendment would make two
administrative changes in Section 43.22.070 (the
administrative section of the bill). First, the amendment
clarified the language around who was required to file a
return with the department. The section currently read "a
person required to pay tax under this chapter is required
to file a return with the department" and the amendment
would change the language to "a taxpayer is required..."
She detailed that a taxpayer was anyone subject to the
chapter whether or not they actually have a tax due. She
characterized the original language as ambiguous because
there were some individuals who would not have a tax due.
Second, the amendment would add subsection (b), which read
"the department shall determine and publish the federal
adjusted gross income level below which an individual
is not required to file a tax return under this
section." The language was similar to what was published
and updated annually at the federal level. The federal
language specified that a person making less than $10,350
in gross income was not required to file - due to their
personal deduction and exemption they did not have a tax
liability. The amendment would give the department the same
authority to publish the table to prevent people with
$1,000 in income from filing.
Representative Wilson referred to the amendment explanation
that it would also allow the department to outline when a
dependent could file on their parents' return. She asked
where it was included in the amendment.
Ms. Hansen replied that she had learned from speaking with
DOR that an individual would cover an individual and could
also be interpreted to cover a dependent. On the federal
level a dependent was able to file under their parents'
return when they had less than the amount required for the
federal tax level ($10,000 earned income or $1,000 of
unearned income). Under the legislation, if the individual
did not have a tax due they could be filed under their
parents' return.
3:48:36 PM
Representative Wilson understood the concept of including a
minimum so people knew when they did not have to file.
However, she did not believe it related to whether a person
could claim a child as a dependent on their taxes. She did
not believe the amendment pertained to when a dependent
could be filed on a parent's return. She surmised that the
amendment only related to whether a dependent had to file
on their own because of their income amount.
Ms. Hansen answered in the affirmative.
Representative Wilson summarized that the amendment merely
established a minimum on who had to file, no matter their
age.
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 5 was ADOPTED.
3:49:32 PM
Co-Chair Seaton MOVED to ADOPT Amendment 6, 30-LS0125\L.18
(Nauman, 3/29/17) (copy on file):
Page 11, following line 14:
Insert new subparagraphs to read:
"(B) a Joss on the sale or exchange of an obligation
issued by or on behalf of
(i) the state;
(ii) a municipality of the state; or
(iii) a public instrumentality, public authority, or
public corporation created under state law;
(C) a Joss from the sale or exchange of shares
in a unit investment trust if the loss is
attributable to an obligation issued by or on
behalf of
(i) the state;
(ii) a municipality of the state; or
(iii) a public instrumentality, public authority, or
public corporation created under state law;"
Reletter the following subparagraphs accordingly.
Page 12, following line 6:
Insert a new subparagraph to read:
"(G) a gain from the sale or exchange of an obligation
issued by or on behalf of
(i) the state;
(ii) a municipality of the state; or
(iii) a public instrumentality, public authority, or
public corporation created under state law;"
Reletter the following subparagraphs accordingly. 6
Page 23, line 14:
Delete "AS 43.22.030(a)(2)(H)"
Insert "AS 43.22.030(a)(2){1)"
Representative Wilson OBJECTED.
Ms. Hansen explained the amendment clarified the definition
of taxable income under the legislation. The bill already
added most municipal obligations into federal adjusted
gross income; the items were not taxed by the federal
government in most cases, but were taxed by the majority of
states. In the definition under AS 43.22.030 (i)(A) it
stated "interest on obligations of another state, a
political subdivision of another state, a public
instrumentality of another state, or the local authority of
another state." The language was due to existing case law
that a state was allowed to tax obligations issued by other
states, but exempt obligations issued by that state. In the
language in (i)(a) the bill was already exempting municipal
obligations from Alaska or bonds issued by the state or
municipalities of Alaska. The amendment helped to clarify
that. There were a few cases where Alaska bonds were taxed
at the federal level. She furthered that because Alaska
municipal bonds were exempted in (i)(a), the language
needed to clarify that in the rare case the federal
government taxed Alaska municipal bonds, the state would
make adjustments. She detailed that a loss would be added
in for an Alaska municipal bond that may have been taken as
a deduction from federal gross income and subtracting any
gains from Alaska municipal bonds or state bonds that may
have been taxed at the federal level.
Representative Wilson asked for verification that if a
person had an Alaska bond, it would be a deduction at the
state level (just like with the PFD) if it was in the
person's federal adjusted gross income, regardless of
whether it made money or had to be claimed on federal
taxes.
Ms. Hansen answered that any gains included in a person's
federal adjusted gross income would not be taxed by the
state.
Representative Wilson asked for verification it was a non-
starter if a person had to file federally. Ms. Hansen
replied in the affirmative.
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 6 was ADOPTED.
3:52:52 PM
AT EASE
3:53:21 PM
RECONVENED
Co-Chair Seaton MOVED to ADOPT Amendment 7, 30-LS0125\L.19
(Nauman, 3/29/17) (copy on file). [Note: due to the length
of the amendment it has not been included here. See copy on
file for details.]
Representative Wilson OBJECTED.
Ms. Hansen explained that the amendment made eight
clarifying changes relating to tax rates and taxable
income. The primary intention was to increase the clarity
of the language. The first was a change to AS 43.22.010
where the tax and tax brackets were laid out. She referred
to existing language "derived or connected with a source in
the state of a nonresident," which could be interpreted as
saying the state that the nonresident is connected to. The
language was changed to make it clear the provision was
talking about income that was derived or connected to
Alaska. Pages 8 and 9 the title of AS 43.22.015 currently
read "allocation of individual income." The amendment would
change the titled to read more accurately as "calculation
of tax on a nonresident individual." The section addressed
the factor used to calculate tax owed by nonresident
individuals. Currently the factor was basically all of an
individual's taxable income was the denominator of the
calculation and any of the taxable income from a source
within Alaska was the numerator. The result was applied
against the individual's taxes. The amendment clarified
that the numerator was the nonresident individual's taxable
income and added the language "under 43.22.045," the
location where income from a source within the state was
defined.
Ms. Hansen moved to page 11 related to allowable
deductions. The amendment would add the words "directly or
indirectly" to read "income that is related directly or
indirectly to income taxable under the state and income
exempt under the federal Internal Revenue Code." The goal
was to align with established tax law.
3:56:28 PM
Ms. Hansen referred to page 12, line 10 of the legislation
where the amendment clarified the trust would not be
eligible for the per person exemption; the exemption was
intended for people and not entities. She turned to page 15
where state source income was defined for income from a
source within the state for nonresidents. The current
language was unclear and implied that the activity items
listed (including compensation and salary or wages for
personal services rendered for employment training; site
inspection; research and development; and farming or
fishing within the state) were considered ancillary or
connected to out-of-state activities. The amendment would
reorder the current language to clarify that the activities
were considered taxable within the state.
Representative Wilson pointed to page 11, line 23 that the
amendment would change to read "adjusted gross income that
is directly or indirectly related to income." She asked for
an example of indirect.
Ms. Hansen believed indirect would include interest income.
She did not receive exact examples; the proposed language
matched language of existing tax laws in other states. She
deferred to DOR for further detail.
Representative Wilson was concerned about how far reaching
indirect income was.
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), answered that
indirect income could have multiple meanings. In the
business community indirect income could be non-business
income (income earned outside the normal course of
business). Additionally, indirect income could be from
securities or other items that were not normally part of an
individual's wages. He cited winning a game of chance or
lottery, which would not be a normal course of a person's
business income.
4:00:47 PM
Representative Wilson stated she could understand how the
scenarios in Mr. Spanos' description would be considered
indirect for a business; however, she did not believe the
examples would be indirect for an individual. For example,
she wondered if she would have to pay income tax on
earnings from winning the lottery in another state.
Mr. Spanos replied that if a person was an Alaska resident
and won the lottery in another state, the portion of the
winnings that were taxable federally would flow through the
individual's adjusted gross income and would be taxable in
Alaska.
Representative Wilson asked how the scenario was classified
as indirect. She asked if anything outside of wages was
counted as indirect.
Mr. Spanos replied that it could be. Indirect income was
defined as income that was not directly earned through some
activity an individual was engaged in. He cited interest on
a bank account as an example.
Co-Chair Foster recognized Representative Jonathan Kreiss-
Tomkins in the room.
Representative Thompson stated his understanding that if a
person won the lottery in California they would be taxed
personal income tax the State of California and the federal
government would tax the winnings as well. He asked for
verification the individual would also have to pay taxes in
Alaska.
Mr. Spanos believed that in the specific example the
California tax would be higher and therefore the
individual's credit would be up to the limit of what they
would have paid in Alaska. The individual would not be
double taxed. If the individual won the lottery in a state
without an income tax, they would pay the full tax in
Alaska. Whereas, if the individual won the lottery in a
state with a smaller income tax, the individual would get
credit for the amount of tax paid in that state and would
pay any difference in Alaska.
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 7 was ADOPTED.
4:03:13 PM
Co-Chair Seaton MOVED to ADOPT Amendment 8, 30-LS0125\L.23
(Nauman, 3/30/17) (copy on file):
Page 22, following line 4:
Insert a new subsection to read:
"(c) Withholding under this section is not required by
a partnership that
(1) is a publicly traded partnership, as defined in
26 U.S.C. 7704(b) (Internal Revenue Code); and
(2) files with the department an annual information
return reporting the name, address, taxpayer
identification number, and other information requested
by the department concerning each unitholder
whose distributive share of partnership income,
regardless of source, is more than $1,000."
Representative Wilson OBJECTED.
Ms. Hansen explained the amendment addressed public
testimony that publicly traded partnerships should not be
required to withhold for their nonresident partners because
they could change hands so quickly. The amendment would
provide an exemption for withholding requirements on
partnerships that a publicly traded partnership would not
be required to withhold.
Representative Wilson appreciated the amendment, but
observed it sounded like a report would be required from
the companies. She how hard it would be for companies to
pull the information together. She noted it would include
any source exceeding $1,000. She asked if the amendment
pertained to a list that had to include individuals living
in-state versus out-of-state. She asked what the report
entailed.
Ms. Hansen responded that in terms of in-state versus out-
of-state, it was listed as each unit holder whose
distributive share of the partnership income was more than
$1,000. She believed it was very similar to K-1 information
return that was already filed. She referenced testimony by
a Tesoro representative who had cited Iowa as an example
that also required the information return. She believed
companies were likely filing a similar return with the
federal government. She did not believe it would be
burdensome.
Representative Wilson asked if they knew for a fact that
companies filed the same report with the federal
government.
Ms. Hansen replied that she knew with certainty that the
report was required in Iowa. She knew that partnerships
were required to file a K-1 return. She believed the
information required for both reports would be very
similar. She noted that DOR would be the entity responsible
for crafting the actual return a company would be required
to file.
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 8 was ADOPTED.
4:05:54 PM
Co-Chair Seaton MOVED to ADOPT Amendment 9, 30-LS0125\L.25
(Nauman, 3/30/17) (copy on file). [Note: due to the length
of the amendment it has not been included here. See copy on
file for details.]
Representative Wilson OBJECTED.
Ms. Hansen explained the amendment. She referred to
sections of the bill pertaining to the allocation of income
(e.g. distributive shares from a business with income
allocated to partners). The amendment would remove the
current phrase "income or a gain, loss, or deduction," and
would replace it with "an item of income, gain, loss, or
deduction." The phrasing was established across all states
and was used for allocations, especially related to
partnership shares. The amendment would make things easier
for interpretation by businesses and the courts if
necessary.
Representative Pruitt referred to the language change from
income to item. He asked if the language referred to the
benefits that could come with being an S corporation. He
detailed there were certain times where a shareholder or
director of an S corporation may use a company car or
receive benefits or "perks." He asked if the amendment was
trying to get at that specific situation. He furthered that
it reached beyond the salary a person would receive shown
on an individual's W-2 form.
Ms. Hansen replied that she did not believe so. She
explained that the bill used federally adjusted gross
income and only took things that showed up as federally
taxable income. She addressed the need to adjust for
federal bonds, which the state could not tax, versus
municipal bonds, which the state could tax. For example, if
a partnership owned a municipal or federal bond that was
part of the income source, the income or deduction needed
to be adjusted based on how the item (the bond) had been
allocated among the partnerships on the federal level. She
deferred to DOR for further detail.
4:08:55 PM
Mr. Spanos shared that he had not been involved in the
specific language change. He viewed item of income and
income as synonymous. He noted that the Internal Revenue
Code used the language "item of income" frequently, which
was perhaps why other states were using the same language.
Ms. Hansen expanded upon the reason for the change. When
drafting legislation, Legislative Legal Services
Legislative tried to be as concise as possible. In the
current situation, it was not necessary to use "item"
because the income, gain, loss, or deduction were the
items. However, the specific language in the amendment was
clearly established language used throughout the federal
and state tax codes.
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 9 was ADOPTED.
4:10:27 PM
AT EASE
4:11:34 PM
RECONVENED
Co-Chair Seaton MOVED to ADOPT Amendment 10, 30-LS0125\L.35
(Nauman, 3/31/17) (copy on file):
Page 19, line 31, following "(b)":
Insert "A person required to file a return under this
chapter shall file the return on a form or in a format
prescribed by the department. The return is due to the
department at the same time and in the same manner,
including extensions, as the taxpayer's federal income
tax return to the United States Internal Revenue
Service."
Page 20, line 27:
Delete "A taxpayer"
Insert "An individual"
Page 20, line 29:
Delete "taxpayers"
Insert "individuals"
Page 20, following line 29:
Insert a new subsection to read:
"(i) The department shall adopt regulations that
set out requirements for a spouse, upon request, to
be partially or fully relieved from joint and several
liability resulting from the I 9 joint filing of a
tax return."
Page 23, following line 22:
"(b) Sections 26 U.S.C. 6654, 6662, 6664, 6694, 6695,
6700 - 6702, 6707, 6713, 7201, 7202, 7206, 7207, 7216,
7407, and 7408 (Internal Revenue Code), as those
sections read on January 1, 2017, are adopted by
reference as a part of this chapter."
Reletter the following subsection accordingly.
Page 23, line 24, following "(a)":
Insert "and (b)"
Representative Wilson OBJECTED for discussion.
Ms. Hansen explained that the amendment was administrative
and had been mentioned by Mr. Spanos earlier in the
meeting. The amendment clarified that the tax return was
due to DOR at the same time the federal tax returns were
due, including any extensions the federal government may
offer. The current section "070" in the bill specified that
the tax was due at the same time as federal tax, but it did
not specify when the return was due. She pointed to page
20, lines 27 and 29 clarified that individual was exempt
from electronic filing. She explained that previously the
language had used the word "taxpayer," which could apply to
partnerships withholding on behalf of their nonresident
partners. All corporations were required to file
electronically, although there were waivers they could
obtain. The amendment would add a subsection on page 20
outlining that the department shall adopt regulations that
set out requirements for a spouse to be partially or fully
relieved from liability from the tax under the specific
chapter. She detailed that normally when a couple filed
jointly both spouses were considered liable for the tax,
but there were certain circumstances where spouses could
apply to be held separately liable.
Ms. Hansen directed attention to page 23 to Section
43.22.095 where definitions from the Internal Revenue Code
were adopted as if they were referenced in the chapter.
Some of the penalties used by the Internal Revenue Code
would also be adopted. She referred to penalties for the
failure to report transactions, failure to collect or pay
tax, understatement by a tax preparer, and failing to
prevent a tax preparer from engaging in unlawful
activities. The amendment would adopt a list of penalties
by reference.
4:15:21 PM
Representative Wilson remarked that for almost every state
an individual was liable for what their spouse did and
typically both individuals were required to sign a tax
return. She wondered why they would alleviate the
responsibility.
Ms. Hansen answered that in most cases it would still be
required. She deferred to Mr. Spanos for additional detail.
Mr. Spanos answered that other states had the type of
allowance as well. The specific situation related to a case
where an individual had committed fraud and their spouse
was unaware of the fraud. Under the scenario, the innocent
spouse would not be liable for the penalty in additional
taxes imposed. The individual could apply and would have to
prove to DOR or the court that they had no knowledge of the
fraud.
Representative Wilson believed a person should not sign
something they did not believe was accurate. She asked how
someone would prove they did not know something.
Mr. Spanos responded that because Alaska did not have
individual income tax the issue had not been dealt with in
Alaska previously. He provided an example of a husband who
owned a business partnership that was committing fraud.
Under the scenario the income doubled on the individual
income tax return. He explained that the wife had signed
the return, but she would have had no knowledge of the
fraud taking place. Most states had a provision allowing a
person to prove what they would need to provide in order to
prove they had no knowledge of the fraud. He would need to
speak with other states in order to write the regulation if
the amendment passed.
Representative Wilson asked if the federal government had
the provision.
4:17:36 PM
Mr. Spanos believed so, but he did not know for certain.
Representative Wilson surmised it would be very hard for a
person to prove they did not know something. She detailed
that when an individual signed their income tax return they
were verifying the information was correct to the best of
their knowledge. She thought the amendment language would
mean a person would not have to file a significant amount
of information in order to be relieved from the liability.
She asked if there was someone available from the
Department of Law (DOL) who would be responsible for the
provision. She thought it could be expensive.
Co-Chair Foster relayed there was no one available from DOL
at present.
Representative Wilson could not agree with the portion
without knowing the cost and whether it could even be
utilized. She would be surprised to learn the federal
government had similar loopholes.
Co-Chair Seaton clarified there instances of joint filers
where one spouse was a resident and the other was a
nonresident. He explained that an individual could be
conducting business in Alaska and the spouse could file
jointly in another state. He surmised that under the
example a spouse may not have knowledge of what had taken
place. There were provisions specifying that all of the tax
was counted as resident tax - there was not tax avoidance.
There may be a non-working spouse who was a nonresident.
There could be a reasonable situation where one spouse
could claim they had nothing to do with the situation. It
had been one of the problems with the previous bill version
related to joint filers (one of whom was a resident and the
other was a nonresident). He stated that with adjusted
gross income the issue had been somewhat solved.
Representative Wilson appreciated the comments, but
underscored that the spouse [with no knowledge of the
fraud] would still be required to sign. She spoke to her
personal experience with tax filing. She continued that
even with one person in-state and the other out-of-state,
she surmised DOR would still require both individuals to
sign. She did not know what the cost would end up being if
the issue went to court. She wondered what information the
state would require for a person to prove they were not
liable. She stated that in most cases the more people who
were responsible for paying increased the likelihood the
tax would get paid.
4:22:28 PM
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Grenn, Stutes, Ortiz, Pruitt, Thompson, Foster,
Seaton
OPPOSED: Tilton, Wilson
Vice-Chair Gara was absent from the vote.
The MOTION PASSED (7/2). There being NO further OBJECTION,
Amendment 10 was ADOPTED.
4:23:16 PM
Representative Ortiz MOVED to ADOPT Amendment 14, 30-
LS0125\L.29 (Nauman, 3/30/17) (copy on file):
Page 12, line 7:
Delete "and"
Page 12, line 10, following the second occurrence of
"individual":
Insert"; and
(I) 50 percent of municipal property taxes paid in
the taxable year on the residence in the state of an
individual; the deduction under this subparagraph
may not be taken for more than one residence
for each tax return"
Representative Pruitt OBJECTED.
Representative Ortiz explained that the amendment would
allow an individual to deduct up to 50 percent of their
local property taxes paid for an Alaskan residence. The
deduction would be limited to one residence per return
filed. He explained that the concept was fairly simple and
spoke to the idea of giving credit to people who were
currently paying property taxes. He detailed there was a
2.65 mill assigned to property taxes that went directly to
support state education costs. The amendment would
effectively acknowledge that and give credit to the
individuals paying that particular tax. The deduction would
be put against the federal adjusted gross income line (like
the personal income exemption of $4,000 and the PFD
deduction); the amendment would enable the individual to
add 50 percent of their property tax bill before getting to
the Alaska adjusted gross income.
Representative Pruitt clarified that did not object to the
amendment, but he planned to offer an amendment to the
amendment, which was currently being photocopied.
Co-Chair Foster asked for clarification on the amendment.
He referred to Representative Ortiz's explanation that the
deduction would be included above the adjusted gross income
line. He calculated that if a person had a $4,000
exemption, a $1,000 deduction for the PFD, and a $1,000
property tax deduction. He asked for verification that if
the individual earned $50,000, their adjusted gross income
would be $44,000.
Representative Ortiz agreed. He added that committee
members had received a copy of an email from Mr. Spanos who
had done an analysis of the amendment's impact. The
amendment would reduce the amount of income taken by an
income tax by about $6.3 million. He believed the projected
revenue from an income tax was about $65 million, which the
amendment would reduce by about $6.3 million.
Representative Wilson remarked that renters paid property
taxes. She elaborated that any good landlord would ensure
that the costs were included in the rent. She detailed that
some states gave credit for renters. She reminded the
committee that individuals who may not be able to afford to
buy a home were still paying. She believed the amendment
would pick one group over another, which she found
concerning.
4:27:27 PM
Representative Grenn echoed Representative Wilson's concern
and was trying to determine how to draft an amendment to
provide a deduction to renters. He used a 10 percent
deduction from renters' income per year as an example.
Representative Tilton asked if the definition of residence
was included. She noted that the amendment specified a
deduction could not be taken from more than one residence
and she believed the sponsor was speaking to a residence
inside and outside the state. She asked if it was possible
to have more than one residence in the state.
Representative Ortiz cited the specific amendment language:
"50 percent of municipal property taxes paid in the taxable
year on the residence in the state of an individual; the
deduction under this subparagraph may not be taken
for more than one residence for each tax return." He
clarified that if a person had two residences in Alaska
they would not be able to take a second deduction.
Representative Tilton asked for clarification that an
individual would select the residence that would bring the
most beneficial deduction.
Representative Ortiz agreed.
4:29:34 PM
AT EASE
4:41:08 PM
RECONVENED
Representative Pruitt MOVED to ADOPT Amendment 1 to
Amendment 14.
Co-Chair Seaton OBJECTED for discussion.
Representative Pruitt explained that the amendment to
Amendment 14 would exempt income received from the U.S.
government as retirement pay for a retired member of the
Armed Services of the U.S. and National Guard of any state.
The amendment acknowledged appreciation of the U.S.
military personnel and would include in the opportunity
from removing it from an individual's adjusted gross
income.
Co-Chair Seaton asked for verification that "some of this"
was already exempt above adjusted gross income.
Representative Pruitt responded that some of the retirement
was exempt, but a portion was considered income.
Mr. Spanos believed some retirement income was already
excluded from adjusted gross income, but he did not have
the specifics. He offered to get back to the committee.
Co-Chair Seaton objected to the amendment to Amendment 14
because a portion of the retirement income for Armed
Services were already excluded under adjusted gross income.
He spoke to the amount determined by the federal government
for military members for deduction. He imagined there was a
worksheet an individual went through and the outcome
depended on the person's level of income. He surmised it
would all be calculated prior to getting to adjusted gross
income.
4:44:00 PM
AT EASE
4:44:54 PM
RECONVENED
Representative Ortiz was not opposed to the idea of the
amendment to Amendment 14; however, he believed the issue
was separate and that there should be a separate amendment.
Representative Wilson disagreed. She underscored that the
door had been opened on things to be included and things to
be excluded. She believed there had been testimony on the
topic - the committee had heard from military and seniors
about their income. She stated that young military members
did not make high pay - many were on food stamps and other
support. She believed if the committee was going to
consider an exemption for one group it needed to consider
all groups. She thought the military was important to the
state. She also did not believe enough could be done for
service members.
4:46:48 PM
Vice-Chair Gara recognized there were military members that
did not make much in the way of a pension. He referred to
his colleague's statement that some military members were
on food stamps. He elaborated that the bill did not tax,
with the PFD, income below roughly $15,500 [for an
individual] and $31,000 for a joint filer. Additionally,
$4,000 was tax free per dependent. He thought the food
stamp issue was addressed. He asked what portion of pension
income was already excluded from taxation.
Mr. Spanos responded that he had access to the information
online and it appeared that military retirement pay, based
on age or length of service, was considered taxable income
for federal purposes. However, disability retirement pay
and veterans benefits were fully excluded from taxable
income.
A roll call vote was taken on the motion.
IN FAVOR: Grenn, Stutes, Ortiz, Pruitt, Thompson, Tilton,
Wilson, Gara, Foster
OPPOSED: Seaton
The MOTION PASSED (9/1). There being NO OBJECTION,
Amendment 1 to Amendment 14 was ADOPTED.
4:50:09 PM
AT EASE
4:50:24 PM
RECONVENED
Representative Pruitt MOVED to ADOPT Amendment 2 Amendment
14.
Representative Wilson OBJECTED.
Representative Pruitt explained that the amendment to
Amendment 14 would exempt social security benefits [from an
income tax]. He discussed the large and growing population
of seniors in Alaska. He had been told by the Alaska
Council on Aging that Alaska had the fastest growing
population of retired individuals per capita. The amendment
would recognize that an income tax would put an undue
burden on some of the state's seniors.
Representative Wilson wanted to amend the amendment. She
stated there were many individuals who received pensions,
but did not receive social security benefits due to the
kind of job they had. She opined that if the exemption was
given to some seniors it should be given to all seniors.
She suggested adding "and pensions" to the amendment.
Representative Pruitt did not have a problem with the
suggestion.
4:52:14 PM
AT EASE
4:53:49 PM
RECONVENED
Co-Chair Foster noted the committee would take a break. He
asked Representative Pruitt to withdraw his proposed
Amendment 2 to Amendment 14 and bring back a written
amendment after the break.
Representative Pruitt WITHDREW Amendment 2 to Amendment 14
with the intent to address the issue later.
4:54:45 PM
RECESSED
6:29:30 PM
RECONVENED
Representative Ortiz WITHDREW Amendment 14.
Representative Ortiz WITHDREW Amendment 15, 30-LS0125\L.29
(Nauman, 3/30/17) (copy on file).
6:30:06 PM
Vice-Chair Gara MOVED to ADOPT Amendment 16, 30-LS0125\L.27
(Nauman, 3/30/17) (copy on file). [Note: due to the length
of the amendment it has not been included here. See copy on
file for details.]
Representative Wilson OBJECTED.
Vice-Chair Gara explained that he had worked with DOR on
the amendment language. He stated that sometimes a bill was
difficult to read and he believed people had the
misimpression they would start getting taxed at $10,000 of
salary or pension, which was inaccurate. The amendment
included legislative intent language that income as defined
under the bill up to $14,300 for an individual and up to
$28,600 for joint filers was not subject to the income tax.
He added that a $4,000 personal deduction was included. He
MOVED to AMEND Amendment 16 for clarity. He noted he had
run the amended language by Mr. Spanos for accuracy:
Page 1, line 6:
After "individual", insert: ", plus income from
Permanent Fund Dividends,"
Page 1, line 9:
After "dependents", insert ", plus income from
Permanent Fund Dividends,"
Page 1, Lines 13 and 14:
DELETE:
"(4) in addition to the deductions described in this
section, the permanent fund dividend will not be
subject to the income tax under AS 43.22."
Renumber all remaining sections accordingly.
Representative Wilson OBJECTED.
Vice-Chair Gara explained that the amendment to Amendment
16 would move the concept in paragraph 4 into subsections 1
and 2. He read the amendment language. In addition to
deductions described in his original amendment explanation,
the PFD would not be subject to the income tax. The intent
was to include clear language at the beginning of the bill
what income would not be taxed by the bill.
Representative Wilson WITHDREW her OBJECTION. There being
NO OBJECTION, Amendment 1 to Amendment 16 was ADOPTED.
Representative Wilson understood Amendment 16 pertained to
legislative intent. She asked for verification the brackets
in the bill were changed, but the amounts were not.
Vice-Chair Gara replied that it was accurate at present,
but if the brackets in the bill and the income levels and
deductions were changed, the amendment language would need
to be rewritten.
Representative Wilson thought there was some inflation
proofing in the bill and wondered if that would change any
of the amendment's legislative intent.
Vice-Chair Gara responded that the inflation proofing in
the future would make less income taxable - there would be
a higher income limit. The intent would become part of the
uncodified law and would not show up in statute. He
detailed that legislative intent could not change the
wording of the bill. The legislative intent would not have
an impact when the schedule was taken over by DOR to
inflation proof the amount of income that was not taxable.
6:34:50 PM
Representative Wilson asked for verification that the
amendment language would just be for people to follow the
issue along in the bill. She surmised that if the bill
passed and became law any legislative intent would not be
included in statute.
Vice-Chair Gara replied that uncodified law did not show up
in statute books, but it could be found if someone was
looking for intent. The bill was clear that the nontaxable
income portion would increase with increases in inflation.
He reasoned that if desired it would be possible to include
language specifying that the amounts in subsections 1 and 2
would be inflation proofed per the legislation. The
amendment would not show up in statute and would not change
the meaning of the bill.
Representative Wilson WITHDREW her OBJECTION. There being
NO further OBJECTION, Amendment 16 was ADOPTED as amended.
6:36:22 PM
Representative Pruitt MOVED to ADOPT Amendment 18.5, 30-
LS0125\L.33 (Nauman, 3/31/17) (copy on file):
Page 1, lines 4- 8:
Delete "relating to the taxation of income of
individuals, partners, shareholders in S corporations,
trusts, and estates; relating to a payment against the
individual income tax from the permanent fund dividend
disbursement; repealing tax credits applied against
the tax on individuals under the Alaska Net Income Tax
Act;"
Page 7, line 5, through page 27, line 14:
Delete all material.
Renumber the following bill sections accordingly.
Page 29, lines 6- 11:
Delete all material.
Renumber the following bill sections accordingly.
Page 29, line 13:
Delete all material.
Renumber the following bill sections accordingly.
Page 29, lines 25 - 28:
Delete all material.
Renumber the following bill sections accordingly.
Page 29, line 31, through page 30, line 3:
Delete all material.
Page 30, line 4:
Delete "(b)"
Insert "TRANSITION: REGULATIONS."
Page 30, line 10:
Delete "sec. 24" in both places
Insert "sec. 20" in both places 14
Page 30, line 12:
Delete "24, 26, and 27"
Insert "20, 21, and 22"
Page 30, 1ine 15:
Delete all material.
Renumber the following bill sections accordingly. 23
Page 30, line 18:
Delete "sees. 28 - 32"
Insert "sees. 23- 26"
Co-Chair Seaton OBJECTED.
Representative Pruitt explained the amendment would remove
the income tax portion of the bill.
Co-Chair Seaton MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Pruitt, Thompson, Tilton, Wilson
OPPOSED: Gara, Grenn, Stutes, Ortiz, Seaton, Foster
The MOTION FAILED (4/6).
6:37:57 PM
Co-Chair Seaton MOVED to ADOPT Amendment 20, 30-LS0125\L.12
(Nauman, 3/28/17) (copy on file):
Page 1, lines 2- 3:
Delete "relating to the management of the budget
reserve fund;"
Page 3, lines 10- 18:
Delete all material.
Renumber the following bill sections accordingly.
Page 4, line 27:
Delete "sec. 8"
Insert "sec. 7"
Page 6, line 13:
Delete "sec. 12"
Insert "sec. 11"
Page 29, line 27:
Delete "sec. 17"
Insert "sec. 16"
Page 29, line 28:
Delete "sec. 17"
Insert "sec. 16"
Page 30, line 10:
Delete "sec. 24" in both places
Insert "sec. 23" in both places
Page 30, line 12:
Delete "24, 26, and 27"
Insert "23, 25, and 26"
Page 30, line 15:
Delete "Sections 16, 17, 20, 22, and 25"
Insert "Sections 15, 16, 19, 21, and 24"
Page 30, line 16:
Delete "Section 9"
Insert "Section 8"
Page 30, line 17:
Delete "Section 13"
Insert "Section 12"
Page 30, line 18:
Delete "sees. 28 - 32"
Insert "sees. 27 - 31"
Representative Wilson OBJECTED.
Co-Chair Seaton explained that the amendment would delete
the following language "relating to the management of the
budget reserve fund." He specified that Legislative Legal
Services and DOL had expressed that the language caused
single subject concern.
Representative Wilson stated that the bill already included
two different subjects: the Permanent Fund and an income
tax. She believed that at a time when the state was looking
for any way to make extra money off of its money, it seemed
the state would want to take advantage of the item the
amendment would delete.
Representative Pruitt agreed that the bill was already
violating the single subject rule with its inclusion of the
Permanent Fund and the income tax. He did not understand
why the bill could include those subjects but not language
pertaining to managing the money in the budget reserve. He
stressed that if the committee was going to remove the
budget reserve language for that reason, it should also
apply the single subject rule to the entire bill.
Otherwise, he believed the state would get sued.
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Grenn, Stutes, Ortiz, Seaton, Foster
OPPOSED: Pruitt, Thompson, Tilton, Wilson
The MOTION PASSED (6/4). There being NO further OBJECTION,
Amendment 20 was ADOPTED.
6:40:39 PM
Co-Chair Seaton MOVED to ADOPT Amendment 21, 30-LS0125\L.11
(Nauman, 3/28/17) (copy on file):
Page 1, lines 1 - 2:
Delete "relating to the Alaska permanent fund;
relating to the procurement by the Alaska Permanent
Fund Corporation;"
Page 2, line 1, through page 3, line 2:
Delete all material.
Renumber the following bill sections accordingly.
Page 4, line 27:
Delete "sec. 8"
Insert "sec. 6"
Page 6, line 13:
Delete "sec. 12"
1nsert "sec. 10"
Page 29, line 27:
Delete "sec. 17"
Insert "sec. 15"
Page 29, line 28:
Delete "sec. 17"
Insert "sec. 15"
Page 29, line 31:
Delete "(a)"
Page 30, lines 4 - 7:
Delete all material.
Page 30, line 10:
Delete "sec. 24" in both places
Insert "sec. 22" in both places
Page 30, line 12:
Delete "24, 26, and 27"
Insert "22, 24, and 25"
Page 30, line 14:
Delete all material.
Renumber the following bill sections accordingly.
Page 30, line 15:
Delete "Sections 16, 17, 20, 22, and 25"
Insert "Sections 14, 15, 18, 20, and 23"
Page 30, line 16:
Delete "Section 9"
Insert "Section 7"
Page 30, line 17:
Delete "Section 13"
Insert "Section 11"
Page 30, line 18:
Delete "sees. 28- 32"
Insert "sees. 26 - 29"
Representative Wilson OBJECTED.
Co-Chair Seaton explained that the amendment would delete a
provision that violated the single subject rule. He
detailed that the bill related to revenues for the state
and the bill related to a procurement process by the
Permanent Fund, which was quite different.
Representative Pruitt asked if DOL had been asked about its
thoughts on the single subject rule before the provision
had been added. He stated that the bill was already in
violation of the single subject rule. He elaborated that
the legislation would use some of the money the Alaska
Permanent Fund Corporation (APFC) had wisely been managing
for the state and would not give the corporation the tools
to manage it appropriately. He continued that APFC had said
it needed the language the amendment would delete, which he
noted had been included in a bill the previous year and
there had been no concerns at that time. He believed there
was a double standard going on. He asked what Legislative
Legal Services had said about the whole bill. He believed
the agency had specified that the whole bill violated the
single subject rule.
6:42:35 PM
Representative Wilson wanted to see the legal opinion. She
did not recall receiving a legal opinion related to the
previous amendment or the current one. She stated that the
committee had voted "on it" the previous week and she had
never received a call from Legislative Legal Services. She
could not imagine the agency would not want to ensure the
committee "stayed on the straight and narrow" pertaining to
the legislation. It was her understanding that if
legislation violated the single subject rule it could
result in the entire bill getting thrown out. She thought
all committee members would want to be very careful with
the single subject rule. She stated that the language the
amendments would remove had just been put into the bill and
would have violated the rule, compromising the entire bill.
She commented on the broadness of the bill title and noted
that during her tenure in the legislature it had been
possible to "pretty much stick anything in as long as it's
got something in common." She stated that the bill was
going after people's hard earned money. She reasoned that
the language the amendment would remove would save money
and result in more money going to the people if it remained
in the bill. She underscored that the language did no
damage and gave APFC - that had shown it knew how to invest
money - the ability to do its job better and more
efficiently. She stated that including the language was
smart. She reasoned that when efficiency could be increased
and more money could be made on existing funds, the
legislature should be doing everything it could to make
that happen.
Vice-Chair Gara stated that he would support the concept in
a way that could be done constitutionally. He continued
that legislators had all sworn to uphold the constitution.
He opined that people had been very loose with the
constitutional provision on the single subject rule in past
years. He relayed that he had taken significant "heat" for
trying to follow what he believed was the constitutional
role. He stressed that the legislature knew from legal
memos that if something was inserted in legislation that
violated the constitutional provision it could potentially
make the entire bill unconstitutional and the legislature
would not find out until a court ruling. He stated that he
would love to include a foster care bill in the current
legislation, but that was not possible because it would
violate the single subject rule. He referred to statements
made that including the Permanent Fund and an income tax in
one bill was an issue he would also consider. He stated
they were both revenue bills, but he would want to be
convinced there was no single subject problem - so far he
had been convinced there was not. Whereas, the language the
amendment would remove seemed to violate the constitutional
provision. He would support the subject in other
legislation.
Co-Chair Seaton discussed that the bill was a state revenue
restructuring act. The provision that Amendment 21 would
delete had been added to the bill as an amendment. He did
not know whether the maker of the amendment obtained a
legal memo stating it would be a violation of the single
subject rule. He elaborated that when constructing a bill
it was common to receive memos from Legislative Legal
Services advising of a problem. He relayed that an income
tax and the Permanent Fund restructuring both fell under
the topic of the state revenue restructuring act. He
furthered that a procurement process by APFC was outside of
revenue restructuring - it was a managerial method.
Representative Pruitt asked if there was a legal opinion
specifying the bill did not violate the single subject
rule.
Co-Chair Seaton replied he had no legal opinion stating
that the bill as introduced (the state revenue
restructuring act) violated the single subject rule.
6:48:06 PM
Representative Wilson read from a legal opinion on the
single subject rule dated April 16, 2016:
All that is necessary is that the act should embrace
some one general subject; and by this is meant,
merely, that all matters treated of should fall under
some one general idea, be so connected with or related
to each other, either logically or in popular
understanding, as to be parts of, or germane to, one
general subject.
Representative Wilson stated "talking about the Permanent
Fund, this talks about the Permanent Fund - I would say
that that would definitely pass the one subject rule."
Co-Chair Seaton explained the bill before the committee was
a state revenue restructuring act and a procurement process
did not deal with revenue. The procurement process was an
internal revenue process by APFC and fell outside of the
revenue restructuring topic.
Representative Pruitt MAINTAINED the OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Grenn, Stutes, Ortiz, Foster, Seaton
OPPOSED: Thompson, Tilton, Wilson, Pruitt
The MOTION PASSED (6/4). There being NO further OBJECTION,
Amendment 21 was ADOPTED.
6:49:54 PM
Vice-Chair Gara WITHDREW Amendment 21.5, 30-LS0125\L.38
(Nauman, 3/31/17) (copy on file). He relayed that the
amendment had been written before the spending cap had been
passed by the committee. The spending cap left no earnings
reserve money available to put into a larger dividend;
therefore, the amendment no longer worked.
6:50:31 PM
Representative Pruitt WITHDREW Amendment 22, 30-LS0125\L.34
(Nauman, 3/31/17) (copy on file).
Representative Wilson MOVED to ADOPT Amendment 23, 30-
LS0125\L.20 (Nauman, 3/31/17) (copy on file). [Note: due to
the length of the amendment it has not been included here.
See copy on file for details.]
Co-Chair Seaton OBJECTED.
Representative Wilson explained that the amendment would
sunset the bill three years after the effective date of the
Permanent Fund Act. She elaborated that a separate sunset
would be established for the income tax because it would
take longer [to take effect]. The sunset would not shut
down the program, but it would force the legislature to
reevaluate the issue. She reasoned that oil prices could be
different at that time and there may be additional revenue
resources.
6:51:11 PM
Co-Chair Seaton asked for verification the amendment
pertained to 50 percent of all mineral leases offered.
Representative Wilson explained that whenever a sunset
occurred it reverted [statute] back to its previous state
[prior to the passage of legislation] if the sunset was not
extended. If the legislature determined to extend the
sunset, the bill would remain the same.
Co-Chair Seaton opposed the amendment. He relayed that the
legislature was looking for a long-term, comprehensive, and
sustainable fiscal plan. The amendment would mean that
would not occur. Without knowing what would happen in the
future, the provision would require expensive audits to try
to go forward in merely two years [from the present].
Representative Wilson provided wrap up. She underscored
that the amendment would include a three-year sunset
provision. She stressed that it was not automatic and
nothing in the building was automatic. She stated the
amendment would force the legislature to determine whether
the bill was working. She reasoned the sunset could be
extended at any time for as many years as the legislature
chose. She believed the provision communicated to the
public that the state may not be in the current fiscal
crisis forever. The amendment would convey that the
legislature would take another look at the issue in three
years' time. She emphasized that the amendment did not stop
the anything from happening. She believed the amendment
would tell the public that the legislature was doing
numerous things to make government smarter and to do what
it could so state resources would be developed more easily.
Representative Wilson reiterated that the amendment would
force the legislature to review the bill; it would not
automatically go away, it would merely be reconsidered. She
stated that in three years oil may be at $80 to $100 per
barrel, mining may be going well, and there may be other
industries that were not currently in Alaska. She stated
that at that time the legislature may decide that the gap
no longer needed to be filled by the provisions in the bill
because it had been filled by doing other things. She
believed everyone around the committee table wanted to
bring in revenue in other ways besides just taxing
Alaskans. She stated that the amendment would send a
message to the public that the legislature was willing to
look at the issue again in three years. She reasoned that
if the state still needed the revenue at that time, it
would be possible to remove the sunset or extend it. She
continued it would allow the legislature to determine
whether the appropriate amount of money had been used from
the Permanent Fund and whether the state ended up with
unintended consequences from the income tax. She explained
that the sunset provision would take effect three years
after the effective dates of the bill; therefore, because
the income tax would not start for another year, the sunset
would occur three years after that time. She believed the
sunset was the least the legislature could do for the
public.
Co-Chair Seaton MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Tilton, Wilson, Pruitt, Thompson
OPPOSED: Gara, Grenn, Stutes, Ortiz, Seaton, Foster
The MOTION FAILED (4/6).
Vice-Chair Gara WITHDREW Amendment 17, 30-LS0125\L.37
(Nauman, 3/31/17) (copy on file). He believed the contents
had been addressed by another amendment.
HB 115 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster addressed the schedule for the following
day.
ADJOURNMENT
6:57:06 PM
The meeting was adjourned at 6:57 p.m.